As today is the feast of All Hallows Eve (Or Halloween), I thought that I would focus our article on some horror stories regarding things that can possibly go wrong when purchasing property.
Going unconditional on your purchase before the conditions have been met.
In NZ when purchasing any property, the stage where that purchase becomes definite is referred to as an unconditional contract. Unlike the UK where you can miss out on a property to another buyer even on the day the sale is meant to go through (another horror story in itself!), once all the conditions of the contract have been met, then the purchase will occur. It is therefore vitally important that any conditions entered on the contract are addressed as early as possible. On one memorable occasion, we had a client who was moving from one part of the country to Whakatane and presumed that the mortgage they had in place on their previous property could be simply transferred to the new home, so didn’t worry about inserting a finance clause, advising their solicitor that everything was sorted. Unfortunately, their lender’s policy and their own personal situation had changed in the years since the mortgage was first set-up so the bank declined the loan. Fortunately, we were able to find a solution which meant that they were able to obtain a loan from another bank and complete the purchase in the time required.
Other conditions such as building inspections, the ordering of LIM reports and completion of work on the property by the vendor prior to purchase, all need to be followed up, and no contract should ever be declared unconditional without consultation with your solicitor first. In fact, two other useful clauses to remember are, “Subject to solicitor’s approval” and “due Diligence”, both of which will give you time to check any other areas of concern you may have regarding your purchase.
Shortfall of funds on settlement.
We have had phone calls from solicitors on the day before settlement (i.e. when the money gets passed over from buyer to seller) to say that their client has miscalculated and is unable to purchase their new home due to a shortfall of funds. This can happen for a number of reasons, but some of the more common are;
• Forgetting the associated costs of agents and legal fees when selling a property and presuming that a larger amount will be available as a deposit
• Having the deposit safely tucked away in a term deposit or high yield savings account, but failing to note that there may be a period of time that the money has to remain in the account. When working out the settlement date for the purchase it is a good idea to check when you are actually able to access those saved funds.
• The bank requiring repayment of a mortgage prior to the issue of the new home loan. This one is not so common, as in most cases the existing loan can be transferred to the new property, but sometimes lenders criteria will demand a higher amount of equity for different types of property.
Increase of Interest Rate and Loan Repayment cost between unconditional and settlement dates.
Interest rates are constantly being reviewed and changed. To protect against increases prior to settlement, a fixed rate can be locked for up to 30-60 days (dependent on lender), meaning that you can guarantee what your rate will be on settlement. Your adviser should have factored in a slightly higher interest rate when working out your comfortable loan affordability figure to protect against slight increases, meaning that once again there won’t be any shortfall in your budget.
It is important therefore to check the amount of funds that you will have towards your purchase to make sure there are no nasty surprises. The horror scenario is that you are unable to settle your purchase on the date stipulated. This will lead to penalties being incurred and in extreme cases can lead to legal action. Therefore the team that helps you with every aspect of your purchase is very important. Your solicitor will be an advocate regarding every aspect of the contract. Your accountant will be able to guide you on any benefits or limitations regarding the purchasing entity and any tax implications and your registered home loan adviser will be able to make sure that you have a stress free home buying experience and will help you avoid the nightmares.
