Advice and Opinion

Home buyers should double check the mortgage clause in OTP

Property Finance Generic

The mortgage clause in some Offer to Purchase (OTP) or Agreement of Sale documents can be confusing, and home buyers and sellers must be sure before they sign these documents that they are not committing themselves to the transaction under unacceptable conditions.

“The mortgage clause usually stipulates that the purchase agreement is subject to the buyers being granted a home loan within a certain period. But because different estate agencies use different OTP documentation, the clause can be worded in different ways,” notes Berry Everitt, CEO of the Chas Everitt International property group.

“So both buyers and sellers need to check it very carefully and make sure they understand exactly what it says, especially if this is their first home purchase or sale.”

He says the clause might, for instance, state that a home loan will be regarded as having been granted even if the buyers only obtain provisional approval. “What this means is that they will be committed to the purchase even if the bank later decides not to give them a loan.”

Alternatively, the clause might attempt to bind the buyers to the sale agreement even if the loan approval is subject to certain conditions that they don’t like – such as having to provide additional collateral as security for the loan, perhaps, or having to take out additional life insurance.

“In addition, both parties need to make sure that the clause gives the buyers enough time to secure a home loan – seven or 14 days may not be enough and if the time given expires it could invalidate the whole agreement, even if the loan is subsequently approved.”

Writing in the Property Signposts newsletter, Everitt says that to avoid such problems, buyers as well as sellers should be sure to deal only with trained and reputable estate agents who will take the trouble to explain any clause in their sale documentation that has financial implications.

“And of course, neither party should ever agree to sign an OTP in which the mortgage clause or any other clause has been left blank and they have been told will be filled in ‘later’”.

“Doing so could put buyers in the serious position of being committed to the purchase even if they don’t obtain a home loan, or having to pay hefty damages to get out of the deal”.

“Alternatively, sellers could find themselves committed to a sale without any cut-off date for loan approval, and similarly facing a struggle to cancel the agreement if their buyers don’t get a bond.”