• Home loan terms and mortgage definitions

  • Adjustments

    The process of allocating expenses (Council, rates, water rates) on settlement day that the seller has paid for but not used.

    When a property is sold, the vendor (seller) is normally entitled to all income (eg. rent) and is responsible for all expenses (eg. council rates, water rates, etc) up until the date of settlement, which normally takes place four to eight weeks after the exchange of contracts. Settlement is the day on which you finalise payment and take possession of the property.

    The purchaser, meanwhile, is entitled to all income and is responsible for all expenses from the date of settlement onwards. Therefore, prior to settlement, the balance of the purchase price of the property needs to be ‘adjusted’ to allow for expenses that have been paid in advance or will be owing at the date of settlement.

    Items for adjustment

    Adjustment items typically include council rates, water rates and strata levies – but may include other charges. Adjustments are calculated by applying a daily rate to each of the relevant items, with the balance of the purchase price adjusted depending on whether the items are paid in advance or are unpaid at the date of settlement.

    Let’s consider two examples of adjustments made to the purchase price of a property, based on a settlement date of 1 June.

    Example: Council rates paid in advance

    The vendor has paid the quarterly council rates of $455.00 for the April – June quarter (ie. up to 30 June) so the purchaser owes the vendor for 1 month of the quarterly bill.

    To calculate the adjustment, a daily rate must first be established. From 1 April to 30 June there are 91 days, which is equal to $5 per day ($455 / 91). Therefore, the purchaser owes the vendor $150 (30 days x $5) for council rates applicable to the month of June. The purchase price of the property will therefore need to be increased by that amount.

    Adjustments on settlement

    If you’re buying a home and would like to know more about adjustments, contact your legal representative. Your solicitor or conveyancer is responsible for identifying and making adjustments prior to settlement.