Can't Settle? What Happens When Rates Rise and the Valuation Comes in Short

Crownmark Lawyers | Property & Conveyancing

On 29 September 2026 the Reserve Bank lifted the cash rate to 4.60 per cent, its fourth increase of the year and a full percentage point above where the year began. Two days later, Cotality reported that national home values had fallen for a sixth straight month, with Sydney 8.6 per cent and Melbourne 7.2 per cent below their recent peaks.

Anyone who signed a contract earlier in the year is now settling in a different market from the one they bought in. The lender's valuation comes in below the price, the loan shrinks, and the buyer has to find the difference by settlement day. This article sets out what the contract says happens if you cannot, in Victoria and New South Wales, and what to do before the date arrives.

A Short Valuation Does Not Change the Price You Agreed

A lender generally works out what it will lend from its own valuation of the property, not from the price in your contract. If the valuer's figure is lower, the loan is smaller and the gap is yours to fill. Take a purchase at $900,000 where the buyer planned to borrow 80 per cent:

• Loan planned: 80 per cent of the price, or $720,000.

• Valuation: $840,000.

• Loan on offer: 80 per cent of the valuation, or $672,000.

• Extra cash needed at settlement: $48,000.

Rate rises add to the pressure, because each one reduces what a lender will advance on the same income, and an approval given months ago may be reassessed before settlement. Off-the-plan buyers are the most exposed: the valuation is done at completion, sometimes years after the price was fixed. Our article on off-the-plan sales in Victoria explains how those contracts work.

None of this affects the seller. Your contract is with the seller and your loan is with the bank, and the seller is entitled to the full price on the day.

Check First Whether You Can Still Walk Away

Some buyers still have a way out when the valuation arrives. It closes quickly.

• A finance condition. If your Victorian contract was made subject to loan approval, you can end it if the loan is not approved by the approval date. The standard condition is strict. You must have applied immediately for the loan described in the contract, done everything reasonably required to obtain approval, and served written notice, with written evidence that the loan was rejected or not approved, within two clear business days after the approval date. You must also not be in default under any other part of the contract when the notice is given.

• No standard finance condition in New South Wales. The standard NSW contract is not subject to finance unless a special condition was added, which is why finance should be confirmed before exchange.

• The cooling-off period. In Victoria, the Sale of Land Act 1962 gives three clear business days from the day you sign, at a cost of $100 or 0.2 per cent of the price, whichever is more. In New South Wales the period ends at 5pm on the fifth business day after exchange, or the tenth for an off-the-plan purchase, costs 0.25 per cent of the price, and is often waived. Neither applies to a purchase at auction. In Victoria the exclusion also covers a sale within three clear business days before or after a publicly advertised auction, and in New South Wales a sale made on the day the property was passed in at auction.

⚠️ Pre-approval is not approval. A pre-approval is an indication from a lender, usually given before anyone has valued the property you end up buying. If you bid at auction on the strength of one, there is no cooling-off period and almost never a finance condition, so you are bound to settle whether or not the loan follows. Our article on buying at auction in Victoria covers what to check before you bid.

If Settlement Day Passes in Victoria

The standard Victorian contract is the form published by the Law Institute of Victoria and the REIV. Under its current edition, released in September 2025, a buyer who does not pay the balance on the due date is in default, and the steps run in this order:

1. Interest starts. It runs on the unpaid balance at the rate fixed under the Penalty Interest Rates Act 1983, currently 10 per cent a year. On a balance of $810,000 that is about $220 a day. Earlier editions and some other contract forms add a further 2 per cent, and a special condition can set a higher rate again, so check which edition you signed and what was added to it.

2. The seller can serve a default notice. It gives you 14 days to settle and to pay the interest and the seller's reasonable costs. A properly drawn notice also states that the contract will end if it is not met.

3. The contract ends. The deposit, up to 10 per cent of the price, is forfeited to the seller, whether or not all of it has been paid. Within one year of the contract ending, the seller can resell and recover any shortfall and the costs of resale from you, or keep the property and sue for damages.

⚠️ Be careful what you say to the other side. Telling the seller that you will not or cannot settle can amount to repudiating the contract. If the seller accepts that, the contract can end without any notice period, in either state, and the seller can keep the deposit and claim damages. A message meant to open a negotiation can be read as walking away. Let your lawyer do the talking.

In New South Wales the Steps Differ and the Result Is Similar

Under the standard NSW contract, missing the completion date does not end anything by itself. A seller who is ready to complete must ordinarily first serve a notice to complete, which usually allows 14 days and makes that new deadline final. Most contracts also carry a special condition charging interest on the unpaid balance for each day of delay.

If the notice is not met, the seller can terminate. The seller can then keep or recover the deposit, to a maximum of 10 per cent of the price. If the property is resold under a contract made within 12 months of termination, the seller can recover the shortfall and the reasonable costs of the default and the resale. The alternative is a claim for damages.

The Deposit Is Not the Limit of What You Can Lose

Buyers tend to treat the deposit as the worst case. In a falling market it may not be. If the seller resells for less, the shortfall is yours to pay, with credit for the deposit already forfeited.

Go back to the $900,000 purchase, with a $90,000 deposit paid. If the seller resells at $820,000, the shortfall is $80,000. The forfeited deposit covers that, but the seller's costs of the default and the resale are counted as well, so a further claim is still possible. If the resale is at $780,000, the shortfall is $120,000: the buyer loses the deposit and owes another $30,000, plus those costs.

Paying a smaller deposit up front does not cap the exposure either. Where the contract fixes a 10 per cent deposit and only part was paid on signing, the seller may be able to claim the unpaid part as well. Courts in both states have a discretion to order a deposit returned, and they use it sparingly.

What to Do Before the Date, Not After It

Every option below is easier, cheaper and more likely to be accepted before settlement day than after it.

• Tell your lawyer and your broker the day you find out. Time is the one thing that widens your options.

• Test the valuation. Ask your broker whether it can be reviewed, or whether another lender will value the property differently.

• Find the gap. Savings, help from family, or a higher-ratio loan with lenders mortgage insurance may cover it. If a relative contributes, decide whether it is a gift, a loan or a share in the property and record it. Our article on buying property with someone else explains why.

• Ask for more time before the due date. A seller does not have to agree and will usually want interest for the delay. Get any extension confirmed in writing.

• Consider adding or substituting a buyer. The Victorian contract lets you nominate a substitute or additional purchaser no later than 14 days before settlement. You stay liable under the contract and there can be duty consequences, so take advice first.

• Negotiate an exit. A seller facing a default process and a resale may prefer an agreed release on terms.

Saying nothing and letting the date pass is the most expensive choice available.

If You Are the Seller

A buyer's default is expensive for the seller too, particularly where the sale was meant to fund the next purchase. Three points matter:

• Be ready to settle yourself. Your rights depend on being ready, willing and able to complete on the due date.

• Serve the right notice in the right form. A defective default notice or notice to complete may not be enforceable, and acting on one can put the seller in the wrong.

• Watch the clock on a resale. In Victoria the contract gives the seller one year from the date it ends to resell and recover a shortfall. In New South Wales the resale contract must be made within 12 months of termination.

Crownmark Lawyers acts for buyers and sellers in Victoria and New South Wales, from contract review and finance conditions through to extensions of settlement, default notices, notices to complete and settlement. Under Crownmark Assured Pricing, the fee is fixed and agreed before the work begins. If your valuation has come in short or your settlement date is at risk, we are happy to talk it through before the date arrives.

Harjit Mahindroo

Managing Partner

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This article is general information about contracts for the sale of land in Victoria and New South Wales and is current as at October 2026. The Victorian commentary is based on the September 2025 edition of the Law Institute of Victoria and REIV contract of sale of land, and the New South Wales commentary on the 2022 and 2026 editions of the Law Society of NSW and REINSW contract for the sale and purchase of land. Earlier editions, other contract forms and special conditions differ, and the dollar figures are illustrations only. It is not legal or financial advice and does not take account of your particular circumstances. For advice on your contract, please contact us or another qualified practitioner.