Buying off the plan - what you need to know about lending conditions
Buying off-plan can be more affordable and flexible than buying an existing property. However, it’s important you’re fully aware of all the benefits as well as any potential pitfalls, in particular those related to lending conditions.
If the market continues its growth, buying off-plan means there’s a good chance a property will be worth more than its current market price upon completion. Often, the purchase price will be less compared with an established property, as developers will be keen to incentivise buyers in order to secure the project. There’s also the incentive of reduced stamp duty on new homes for first time homebuyers in some states, as well as more tax depreciation available on new properties, improving your after-tax cash flow.
Despite this, purchasing off-plan can be a gamble. There’s no guarantee the property market will continue its uphill trajectory, and the state of the economy could change between purchase and completion, causing the RBA to increase interest rates. This could be problematic if you’re looking to fix the term of the loan at the bank’s current interest rate.
Because of the uncertainty in buying off-plan, lenders are beginning to restrict some lending. Your ability to service the loan could be affected by a change in the market, your financial position, or interest rates between the time you agree to buy and actually purchase the property. Strict conditions from the banks regarding a borrower’s ability to pay instalments may act as a roadblock to potential investors.
Initially, investors will only have to pay a deposit in order to secure the property, and won’t need to make the entire payment until the property is built. Although this does give them a chance to get their finances in order and seek conditional approval for off-plan purchases, the funds won’t be loaned until construction is completed, a full valuation is carried out, and your financial situation has been re-evaluated. If your situation or the lending criteria has changed, you may risk being declined and losing your deposit.
A key factor to consider is the length of the settlement date. If it’s more than 18 months away, it’s highly unlikely you’ll be eligible to apply for a mortgage. You should also be aware of any unexpected costs or conditions included in the contract that could affect your investment further down the line, such as sunset clauses (which allow developers to rescind a contract if construction is not completed by a certain date), if the property can be sold before completion, and who takes responsibility for any defects.