Buying off‐the‐plan can be a great idea in a rising and booming property market. For a deposit of 10% with a settlement time frame of 1‐2 years the capital gain in that 1‐2 years could result in a 100% return or more. Of course, if the property market turns against you, the results can be catastrophic.
What Is Buying Off-The-Plan?
Buying off‐the‐plan is where a developer has an approved plan to build/construct a block of apartments and to ensure quick sales on completion of the project will offer the units for sale prior to the start of construction. The buyer of an off‐the‐plan unit will agree to buy now, but only pay a deposit of 5% to 10%. The balance of the purchase price is due when construction is completed.
What Are The Benefits Of Buying Off-The-Plan?
The primary benefits when buying off‐the‐plan are:
- No need for physical inspection of the property as the unit is brand new
- In some states there are considerable stamp duty incentives/discounts (such as Victoria)
- In a rising property market the purchaser could see considerable gains in property values before completion/settlement with some purchasers even on‐selling prior to settlement turning a quick profit
- Some developers will offer guaranteed rental returns for a year or two post completion
Finance For Off The Plan
Traditionally, Banks and Lenders will lend against the Contract Price. Some Investors will argue that the price of the security has risen since the purchase and therefore lending margins should be calculated against current market value. We hear this criticism of traditional lending policy often. Banks will value the security once it is registered and use the lower amount between the Contract Price of Valuation Price to calculate the Loan to Value Ratio LVR.
We have a Lender that has taken the opposite approach to traditional Banks and other Lenders. Realising that this policy does not make practical sense, it is now possible to obtain a loan based on the current valuation not the Sale Price.
Investor purchased an Off the Plan Apartment for $630,000 and paid a deposit of 10%.
Two years later when the Apartment was finalised, the value had risen to $815,000.
The Investor’s Bank advised that in order to avoid Lender’s Mortgage Insurance the Investor had to contribute another 10% which was $63,000 to complete the transaction and avoid Lender’s Mortgage Insurance.
Even though there were numerous Apartments that were selling for $815,000 in the same complex and surrounding area.
By taking the Loan to the Lender with the more commercially sensible and client friendly approach. The Investor was able complete the transaction without utilising more funds. This allowed the Investor to save on Lender’s Mortgage Insurance and hold onto more cash for the next investment.
What Are The Risks of Buying Off The Plan?
The main risk when purchasing off‐the‐plan is arranging home loan finance. No lender will agree to approve a home loan for an indefinite period of time, and the maximum approval period for an unconditional offer is usually only six months. Therefore, the purchaser runs the risk that when settlement is due the bank will not lend the home loan finance because:
- Valuations have fallen and the purchaser does not have sufficient funds to make up the difference (many off‐the‐plan buyers had this issue in 2010 where some areas suffered a fall in property prices)
- Credit policy has changed resulting in the particular property or applicant being no longer acceptable to the lender (very common during the GFC where banks tightened their credit policy)
- Interest rates have risen resulting in a reduced borrowing capacity and inability to afford the repayments
Should I Buy Off The Plan?
Building Loans Australia recommends that only those applicants who are in a strong financial position should purchase off‐the‐plan apartments. If you are considering purchasing off‐the‐plan you should:
- Determine with Building Loans Australia that they property qualifies for a home loan under existing credit lending policy
- Consider the risks should valuations fall
- Discuss with your solicitor or conveyancer to understand the risks before entering into an unconditional contract
As a general rule, Building Loans Australia recommends that if you are considering off‐the‐plan, you should have a minimum 20% deposit plus costs (or expect to have such a deposit at the time of completion).
When to Contact Building Loans Australia
Whatever you do, don’t sign a contract with the builder/developer before speaking to a financing specialist. If you are considering investing in off‐the‐plan property, we will be happy to advice and support.