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You’ve packed the boxes, organised the cleaners, and mentally moved into the new place. Then your conveyancer rings and says settlement isn’t happening today.
If you’ve been through a Melbourne property deal, you’ll know the feeling. It’s not just inconvenient, it can be expensive. When settlement happens late, the buyer may have to pay penalty interest (often called late settlement interest or default interest). It’s one of those costs that doesn’t look scary on paper, then turns into real money once the days start ticking over.
This is general information only, not personal legal advice. The exact result depends on your contract and what caused the delay.
What people mean by ‘penalty interest’
In most Victorian sales, penalty interest is interest payable when money due under the contract isn’t paid on time. Settlement day is when the buyer pays the balance of the price. If that money isn’t paid on the due date, interest can become payable on the outstanding amount.
It’s not a fine in the parking-ticket sense. It’s a contractual way of compensating the other side for being kept out of their money.
One detail matters a lot: it’s usually calculated on the money still owing, not the full purchase price. In a standard deal, that’s the balance at settlement (price minus deposit, plus or minus adjustments).
When does it kick in?
Penalty interest usually becomes relevant when settlement is delayed because one party is treated as being in default. Common examples we see in Melbourne include:
the buyer’s lender isn’t ready to settle on the day
the buyer’s funds aren’t cleared or there’s a shortfall
settlement can’t proceed because a document or authority hasn’t been provided
a chain settlement collapses and the buyer can’t complete without their sale funds
Sometimes settlement is delayed under a specific clause (for example, where a contract allows a short settlement delay in particular circumstances and treats the buyer as though they were in default for that period). It’s another reminder that the wording matters.
The interest rate: where does the number come from in Victoria?
Many Victorian contracts tie the interest rate to the Penalty Interest Rates Act 1983 (Vic). The Supreme Court publishes the current penalty interest rate. It has been 10% per annum since 1 February 2017.
Older versions of the standard LIV and REIV contract also added a margin on top. One common version set interest at 2% per annum plus the penalty interest rate. If the penalty interest rate is 10%, that produces an effective 12% per annum.
More recently, the standard form contract has been updated and the extra two percentage points was removed in the updated version. So you may see contracts that apply 10% only, and you may still see 12% in older contracts or where a special condition changes the rate.
If you’re unsure which one applies, look for a clause titled ‘Interest’ or ‘Default’. It should spell out the rate.
How penalty interest is calculated (with a simple example)
Penalty interest is usually calculated daily:
Daily interest = (annual rate ÷ 365) × money owing
Example: an inner north townhouse, settlement five days late
Purchase price: $900,000
Deposit: $90,000
Balance due (before adjustments): $810,000
At 10% per annum:
Daily interest ≈ (0.10 ÷ 365) × $810,000 ≈ $221.92
Five days ≈ $1,109.60
At 12% per annum:
Daily interest ≈ (0.12 ÷ 365) × $810,000 ≈ $266.30
Five days ≈ $1,331.50
Your actual ‘money owing’ figure can shift once adjustments are finalised (council rates, water, owners corporation fees, rent if there’s a tenancy, and other items listed in the settlement statement). The interest calculation usually follows the settlement figures, so it should be clear on the statement prepared for settlement.
A small delay can grow quickly. Using the same $810,000 balance at 12% per annum, a 14-day delay works out at roughly $3,728 in interest. That’s before you add any extra costs like storage or bridging finance.
When and how is it paid?
In most Victorian settlements, the interest is paid as part of settlement itself. Your conveyancer will include it on the settlement statement as an additional amount payable to the vendor, and it will be shown in the figures that are exchanged between the parties.
It can feel a bit surreal when you’re already stressed. Picture a couple in Preston who’ve finished their final inspection, kids in tow, only to hear the bank can’t release funds until the next business day. The interest isn’t a separate invoice that arrives months later, it’s usually dealt with right there in the settlement numbers, so you need the funds available on the day the matter finally completes.
Why settlement runs late in Melbourne (even when everyone is trying)
Late settlements are often caused by timing and paperwork rather than bad behaviour. Typical causes include:
Bank and finance timing
A bank can say ‘all good’ and still be missing one practical step: final signed documents, a valuation, mortgage insurance approval, the formal settlement booking, or confirmation that conditions are satisfied.
This is especially stressful for auction buyers in places like Glen Iris, Brunswick, or Essendon. There’s no finance condition to buy time. The bank needs to match the contract timeline.
Vendor’s discharge of mortgage delays
Even if the buyer is ready, settlement can be held up if the vendor’s lender hasn’t produced the discharge of mortgage in time. If there are multiple loans secured against the property, it can be slower again.
Electronic settlement bumps
Most Victorian settlements are now electronic. It’s smooth when everyone has done their prep, but issues can still pop up: a document rejection, a mismatch in figures, or a party not signing inside the workspace on time.
Clearance certificates and tax steps
Foreign resident capital gains withholding steps can be straightforward, or they can become a scramble if left too late. It’s a ‘start early’ item.
Off the plan registration timing
Off the plan purchases (say, an apartment in Southbank or Docklands) often tie settlement to registration of the plan of subdivision. The contract usually builds this in. Still, once notice is given and the settlement period starts, the same late settlement interest risks can apply if a party can’t complete by the due date.
‘It’s only a day’ can still hurt
Penalty interest is the headline cost, but it’s rarely the only one. A late settlement can also trigger:
removalist and storage costs when the move can’t happen as planned
temporary accommodation if you’ve already moved out
bridging finance interest for sellers who need their sale funds for their next purchase
lost rent if a tenant is ready to move in
There’s also a Victorian stamp duty wrinkle. For contracts entered into on or after 1 July 2022, late settlement interest can be treated as additional consideration for land transfer duty purposes in certain cases, with extra admin steps where the interest amount is high enough. So a delay can have a tail, not just a single interest figure.
What if the seller causes the delay?
Buyers often assume they can charge the seller penalty interest if the seller is late. In practice, penalty interest clauses are usually tied to money owing under the contract. In a normal sale, it’s the buyer who owes money at settlement, so the contract often gives the vendor the clean ‘interest’ entitlement.
That doesn’t leave buyers powerless. Depending on the contract and what’s happened, buyers may have rights to serve a default notice, seek compensation for reasonably foreseeable loss, or negotiate an adjustment as part of a settlement rearrangement. The best option depends on the facts and on the contract wording.
If you’re the buyer: steps that reduce the risk (and the stress)
You can’t control everything, but you can control the basics that most late settlements hinge on.
Treat the lender timeline as urgent
Return loan documents as soon as they arrive.
Ask your broker or bank to confirm when settlement will be booked.
Keep your contribution funds in the right account early, not on settlement morning.
Build a buffer for adjustments, lender fees, and any shortfall.
Don’t go quiet if something feels off
If you suspect finance won’t be ready, tell your conveyancer straight away. A short negotiated extension can be far easier than drifting into default and arguing about notices later.
Keep signing and ID checks simple
There’s always a last-minute authority, verification, or signing step. If you’re travelling or working unpredictable hours, flag it early so it doesn’t become a settlement-week drama.
Book the move with flexibility
Melbourne settlements can run late on the day even when they do complete. If you can, avoid a removalist booking that only works if keys are handed over at 2.00 pm sharp.
If a delay is likely: what helps most
When a delay is coming, speed and clarity matter.
Get your conveyancer and lender talking early, not on settlement day.
Ask for an extension in writing, with a new settlement date that’s realistic.
Confirm whether interest will be charged during the extension and how it will be calculated.
Keep communication courteous. Vendors often have their own moving plans and may be more open to a short extension when they’re kept informed.
If you’re the seller: how penalty interest is usually handled
If the buyer is late, your conveyancer can calculate penalty interest using the contract rate and the amount outstanding, then include it on the settlement statement as an amount payable at settlement.
If the delay becomes serious, the contract’s default notice process may become relevant before stronger rights can be exercised. It’s one reason sellers should get advice early rather than waiting and hoping the buyer ‘comes good’ without a plan.
A quick pre-settlement check you can do today
If settlement is within the next fortnight, ask yourself:
Has the lender confirmed the settlement booking and that all conditions are satisfied?
Are your contribution funds ready and in the correct account?
Have you completed all signing and identity steps?
If you’re selling, has your lender confirmed the discharge timeline?
Have you booked the final inspection and raised any concerns early?
These questions aren’t fancy, but they catch most avoidable settlement delays.
How Pearson Chambers Conveyancing can help
Late settlement interest is one of those issues that feels small until it isn’t. The best outcomes usually come from getting on the front foot early, checking the contract wording, and negotiating calmly before the due date slips.
Pearson Chambers Conveyancing supports buyers and sellers across Melbourne with settlement planning, extensions, and late settlement disputes. If you’d like guidance on your situation, or you want a complimentary Section 32 contract review before you sign, contact us.