Understanding settlement funds

There are a couple of common misconceptions regarding settlement funds.  Many people assume the following for settlement:

  1. that they will only be required to pay the purchase price, less any deposit paid under the contract; and
  2. that their financier will be providing the loan amount and they only need to pay any shortfall of funds.

Unfortunately this isn’t correct and the amount required to be paid to the seller is normally higher and the funds provided by the financier is lower.  This can catch people out by them not expecting such a large shortfall in funds.

What do I have to pay at settlement?

At settlement, any rates, taxes or levies applicable to the property will be adjusted at settlement.  So the buyer will need to make payment of any of these extra costs from the day after settlement to the end of the current applicable period.

As an example, if the contract settles on 1 February, and the current rates period is from 1 January to 31 March, the buyer will need to make payment of the rates from the day after settlement (2 February) to the end of the period (31 March) at settlement.

Fees that may be adjusted and added to the settlement figures are:

  • Water and sewerage access charges
  • Land tax
  • Council rates
  • Body corporate levies
  • Stamp duty
  • Registration fees
  • Legal fees and outlays

What funds will my bank provide?

The actual funds your financier will hand over at settlement, known as the funds available, are the loan amount less any fees.

These fees could include (as a minimum):

  • Loan application fees
  • Government registration fees
  • Mortgage insurance

These fees could amount to a couple of thousand, and therefore your funds available are dramatically reduced at settlement.

For example, you could be loaning $400,000, but after the deduction of necessary fees, your bank may only be providing $389,000 at settlement.

Icon Legal can assist you further with what funds are required for settlement.