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What exactly happens on settlement date

by Chris Lang on August 31, 2008

There are two important dates in the house buying process: the contract date and the settlement date. Contract date is the date when the vendor has signed a contract of sale or a contract note. In most contracts the house price is split in 2 parts, first the buyer pays the deposit (5 – 10 percent of the house price) and the remaining amount is paid on the settlement date.

Settlement date is the day when a buyer, having paid the rest of the house price, receives the keys to his new home. It sounds simple, but many things need to be arranged in advance to make sure settlement goes through smoothly.

Let’s start with how the buyer pays the money. Most people hire a conveyancer to handle the transfer of property from seller to buyer and the conveyancer does most of the job – but it helps if the buyer understands the whole process in details.

A day or two before the settlement date a buyer’s conveyancer receives from the vendor’s conveyancer details of how the money will be paid – how many cheques buyer should prepare, the amounts and names on the cheques.

Things to know about the cheques:

Cheques can be of two types, personal and bankcheques. The difference between the two is that personal cheque can “bounce” – if there is not enough funds in the account to cover the cheque – and bank cheque can’t, here is why. Buyer has to go to the bank and ask a teller to prepare a bank cheque. The amount of money on the cheque is transferred immediately from the buyer’s account into the bank’s account and then a buyer receives a bank cheque, which gives the seller a 100% guarantee they will get their money. Bank cheques cost money to prepare (about $10 each) and personal cheques are much cheaper (we’re talking cents, not dollars).

So what does this mean for the buyer? First, if they are using their own money to pay for the house (as opposed to taking a mortgage loan), the money should be available in their checking account before cheques can be prepared, and not in any kind of savings account. If the money is in a savings account, various limits can apply to amount that can be transferred in one day from savings to checking – so it can take a couple of days until the whole amount is finally in the checking account. If the buyer is taking a mortgage – this issue is irrelevant because all the money is already in the bank’s possession.

A very logical question to ask is – why can’t the seller notify the buyer in advance what are the amounts on cheques so that buyer would have more time to handle this matter. The reason is that usually the vendor has a mortgage on the house, which he is paying off with buyer’s money and venodr’s bank waits until the last possible moment to calculate the amount of interest vendor owes on that loan. This way vendor’s bank is trying to avoid the need for adjustments later on.

Another issue to explore is how much is the stamp duty that the buyer has to pay on the house. These two articles explain the smart way of paying just the small part of it from buyer’s own money and to pay most of the stamp duty using FHOG (First Home Owners Grant) and PPR (Principal Place of Residence) concession.

Once a buyer has prepared the cheques and gave those to the conveyancer before the settlement date, his job is done. Now the buyer is sitting by the phone, waiting for the conveyancers to ring and tell him that the settlement went through just fine and he can collect the keys to his new home.

The last stage of this process is the registration of title – the property needs to be transferred from vendor’s name to buyer’s name by Registrar of Titles. It doesn’t happen on the settlement date, simply because by law the buyer must pay the stamp duty first and only then the title to the property can be transferred in his name. Again, the conveuyancers are sending an agent who handles this process for the buyer – the buyer just needs to come up with the check made to the Registrar of Titles to cover the fee for the transaction.

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