When purchasing a property, Buyers may be focused on the big numbers – the purchase price, deposit and loan amount.
What can be less obvious is the amount of funds ultimately required to complete settlement.
The final amount can differ from earlier estimates once settlement adjustments, lender fees and other costs are taken into account.
In some cases, the amount required from a Buyer may also change quite close to settlement.
Understanding why this happens can help take some of the mystery out of the final settlement figures.
Your approved loan amount may not be the amount available at Settlement
One cost that can easily be overlooked is lender fees.
A Buyer may have formal unconditional approval for a particular loan amount. However, this does not necessarily mean the entire approved amount will be available towards the purchase price at settlement.
Depending on the lender and loan product, fees and charges may be deducted from the loan funds at settlement.
Importantly, these fees may not always be apparent from the formal approval letter provided to the conveyancer. The lender’s final contribution may also not be confirmed in the online settlement workspace until the day before or the morning of settlement.
Where the lender’s contribution is less than anticipated, this can increase the amount the Buyer is required to contribute.
Mortgage brokers and lenders can normally provide further information about lender-specific fees, including what amounts are expected to be deducted from loan funds at settlement.
Other figures can change too
Lender fees are not the only reason a Buyer’s final contribution may differ from an earlier estimate.
Settlement calculations can also include adjustments between the Buyer and Seller. Depending on the property and Contract, these may relate to:
- Council rates;
- Water charges;
- Body corporate levies;
- Rent for an investment property; and
- Other contractual adjustments.
Like lender fees, some of these amount may only be finalised close to settlement.
For this reason, the amount recommended by a conveyancer typically includes a buffer to allow for any changes to the settlement figures.
Why a buffer may be included
A recommended settlement amount may be slightly higher than the estimated amount required at the time it is provided.
This does not necessarily mean that the additional amount will be used at settlement. Rather, a buffer can allow for changes that arise as the final figures become available.
This can be particularly relevant where a lender deducts an unexpected fee or a settlement adjustment changes shortly before settlement.
The appropriate amount will vary between transactions, and there is no single buffer that will be suitable in every case.
Access to funds can also be relevant
Another practical consideration is the time it can take for funds to become available for settlement.
Where a Buyer is required to transfer funds into a law firm’s trust account, the firm may require those funds to have cleared into the account before they can be used for settlement.
A transfer showing as pending may therefore not be sufficient.
The time taken for funds to clear can vary depending on the financial institutions involved, the type of transfer and when the transfer is made. Bank transfer limits and additional security requirements for larger transfers can also affect how quickly funds reach their destination account.
These issues can become particularly relevant where the final amount requires changes close to settlement date. Even where a Buyer has sufficient funds available, there may still be a delay before those funds are cleared and available for use.
What goes into the final Settlement figure?
In addition to the purchase price, the amount required to complete a property purchase can be affected by a number of costs, including:
- Transfer duty, where applicable;
- Conveyancing or legal fees;
- Registration and lodgement fees;
- Settlement adjustments;
- Lender fees; and
- Other costs associated with the transaction.
The particular costs and adjustments will vary from one transaction to another. See our blog detailing Settlement figures here.
A settlement statement prepared by the conveyancer brings together the relevant figures and sets out the amount required from the Buyer based on the information available at that time.
The takeaway
The purchase price and approved loan amount do not always provide the full picture of the funds required at settlement.
Lender fees can reduce the amount actually contributed by the bank, while settlement adjustments and other costs can also affect the final figure, and these changes may only become known right before settlement.
Having an understanding of how the final settlement figure is calculated can make the lead-up less confusing, and help explain why the amount required may differ from earlier estimates.
Ultimately, every transaction is different, and the final settlement figures will depend on the circumstances of the particular purchase.
Our conveyancing team is always happy to assist with any questions about the settlement process or with conveyancing needs more generally. Contact our team today to discuss your conveyancing needs.
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