Note: There have been significant changes to off the plan loan policy so please read below for more information on when to apply for finance.
How much can you borrow?
These ‘off the plan’ purchases are a popular choice because the investor will often get a significant discount below the market value and the property may appreciate in value before settlement occurs.
- First home buyer: 95% of the property value (restrictions apply) or up to 105% with a guarantor.
- Investor: 95% of the property value.
- 100% loans: Available with some of our lenders if you have a guarantor.
- Low doc: 80% of the property value.
- Discounts: Competitive professional package and basic loan discounts are available.
Please call us on 1300 889 743 or complete our free assessment form and one of our mortgage brokers will help you to get your mortgage approved.
When is the best time to apply for my home loan?
- Less than 3 months until settlement: When the building is close to completion, you can apply for formal approval with most lenders. Some want the construction complete and a certificate of occupancy provided prior to settlement.
- 3-18 months until settlement: Unfortunately, this option is no longer available so your pre-approval will expire after 3 months.
- More than 18 months until settlement: You can’t apply for your mortgage if settlement is over 18 months away.
Most lenders can issue an indicative approval at the time you sign the contract but it’s useless unless your situation has remained relatively unchanged by the time settlement comes around.
This could be up to two years away!
If it has changed, you risk being declined, defaulting on the building contract and possibly losing your deposit.
We can provide you an informal assessment so you have a good idea if you will qualify for an off the plan loan.
NSW stamp duty changes
The New South Wales (NSW) government has decided to make temporary changes to stamp duty exemption for first home buyers.
From 1 August 2020, the NSW government increased the threshold for stamp duty exemption for first home buyers from $650,000 to $800,000 for newly built homes and from $350,000 to $400,000 for vacant land.
Read our page on NSW stamp duty changes for more information.
Will banks use the valuation or purchase price?
With a normal purchase, banks tend to use the lesser of the purchase price or valuation when determining how much you can borrow.
However, it isn’t uncommon for more than 12 months or even several years to have passed between when the price was agreed and when the settlement occurs.
Because of this, some banks will use the market value rather than the purchase price when assessing your loan to value ratio (LVR), lenders mortgage insurance (LMI) premium (if applicable) and final loan amount.
Ordering multiple valuations
Some people choose to get valuations from multiple lenders and then apply with the lender that has the highest valuation.
This can allow them to borrow more money or reduce the LMI premium they’d pay.
In theory, this works just fine, but in practice, most lenders require you to apply for a loan before they will do a valuation.
If you apply with multiple lenders then you are almost certain to fail credit scoring for too many enquiries on your file.
However, some lenders can allow you to order a valuation prior to submitting a loan application.
Call us on 1300 889 743 or complete our free assessment form.
We can help you to order valuations prior to applying for a loan so that you can maximise the amount that you can borrow.
Why are the banks so conservative?
Banks tend to be more conservative with off the plan sales because, in some cases, properties are sold for more than they’re worth and the bank valuers have failed to notice the discrepancy.
Although you may make a small fortune from your investment, the bank is only concerned about their risk.
As a result, many banks tend to limit their mortgage loans to 80% of the property value.
By using a mortgage broker, you can find a lender that is willing to take a common sense approach to your off the plan purchase.
Am I paying too much for my property?
We know some people who’ve been sold overpriced off the plan properties by sophisticated marketing companies.
Although we can’t give you investment advice, we strongly recommend that you do your own research.
Consider location, the reputation of the developer and the value of the property before you sign the contract of sale.
In particular, you should look at comparable properties that have been sold in the last six months that aren’t in the same development that you’re buying in.
You can refer to our how to value a property page for more information.
Who can buy off the plan?
In our experience, the following types of borrowers are better suited to manage the risks associated with off the plan properties:
- High net worth investors.
- Second home buyers.
- Borrowers with a large deposit (more than 20%) and a high income.
Who shouldn’t buy off the plan?
- First home buyers with a small deposit.
- Foreigners and Australians living overseas (expats) as lending policy can change.
- Self-managed superannuation funds (SMSFs)
Don’t do this 12 months out from settlement!
To give yourself the best chance of getting approved, your situation should remain relatively unchanged between paying your deposit to applying for pre-approval.
It’s even more critical when settlement is 12 months away so here are some golden rules to follow:
- Don’t change jobs or drop from full-time to part-time, contract or casual work.
- Don’t have children (if possible).
- Don’t apply for a pre-approval early (wait until your 3 months away from settlement) and don’t apply for other credit including car loans, personal loans or credit cards.
- Continue to save a deposit with regular deposits into a bank account.
Have you considered the benefits of buying existing?
The biggest benefits are avoiding the risk of the market going and having to provide a large deposit.
That’s because the valuation on an existing property is done at the time of buying the property, not in several months time after you’ve paid a deposit.
It can be difficult to find the right property at the right price in a seller’s market but that simply means spending a bit more time searching.
Best of all, it’s common to get a much better property at a more competitive price than buying an off the plan property.
Note: This shouldn’t be considered as investment advice.
Predicting property prices is fraught with speculation and heresay.
You should take into account your own financial situation and seek other professional advice before making an investment decision.
The real risks of buying off the plan
The risk of oversupply
Because there’s such a delay between starting construction and actually completing your property, there’s the risk that the market slows down.
As a result, the valuation may come in under value by the time settlement rolls around.
This means you’ll need to come up with a bigger deposit because you’ve already agreed to the purchase price in the Contract of Sale.
We’ve seen this happen time and time again when markets start reaching their peak and development projects going on just about everywhere.
Over the past few years, in Sydney and Melbourne in particular, hundreds of thousands of units have been given Development Approval (DA) by councils.
Many of these units may not even see hammer and nail!
The market could change
This could work for you or against you.
If demand outstrips supply, you’ll get a higher valuation.
This will reduce your LVR, give you a better chance at formal approval and put you in position to leverage equity to invest in the near future.
In the case of oversupply or the changing desires of Australians, values on units may decrease.
If this happens between when you sign the building contract and pay your deposit and settlement, you’ll need to come up with a larger deposit to cover the shortfall.
Foreign investors can suffer from policy changes
In recent years, the Australian Government has been pushed politically to prohibit foreign investment in real estate.
Recently, foreign buyers who signed an off the plan contract 12-18 months ago can no longer qualify for a home loan at the time of settlement.
In addition, June 2017 saw the 12-month deferral of stamp duty payments for off the plan purchases in New South Wales (NSW) scrapped for foreigner investors.
That’s just how quickly lending policies can change!
First home buyers are unprepared to handle the risks
Many first home buyers buy off the plan because it seems normal but few of them have the financial resources if things go wrong.
The reason for this is partly how these developments are advertised to would-be borrowers.
On top of that, more first home buyers are becoming accustomed to the idea of smaller living.
The fact is that it’s a speculative investment not a normal bricks and mortar purchase.
The developer can make changes to the design
It’s true! Developers reserve the right to make variations to the design.
Sometimes the changes are minor and undertaken for safety reasons or unforeseen events but the key is that these changes should not “materially prejudice” you as the buyer.
It’s essential that you seek legal advice from a conveyancer to ensure that the contract allows you to withdraw from the sale and claim back your deposit should the changes be drastic, such as losing a bedroom or a storage area, changes to fixtures or fittings, or a significantly smaller floor area.
It’s not unheard of for a 50m2 unit to turn into a 35m2 studio apartment!
In most cases, off the plan developments come with a “tolerance percentage” for variations, such as 5 to 10 per cent.
Negotiate with the developer, get legal advice as to what the developer can modify, and keep the tolerance percentage as low as possible.
The developer is dodgy
It is highly unusual for off the plan developments to be sub-par in Australia because of our highly-regulated building industry. However, it can happen.
You cannot always protect yourself but you can reduce your risk by undertaking basic due diligence on the developer before paying your deposit:
- A Google search can reveal a lot about the reputation of the developer/builder and real estate agent.
- Find a list of properties that the developer has constructed and liaise with a real estate agent to inspect their quality.
- Check with the local council to determine that the developer has in fact received DA approval.
Financial changes that are outside of your control
It could take up to 2 years for your off the plan property to be complete and in that time it’s expected that your financial situation to remain unchanged.
Even if you didn’t plan to, sometimes things are out of your control such as getting sick, injured or losing your job to redundancy.
Sometimes pregnancy can take you by surprise – we’re only human!
The strict financial requirements that are placed on borrowers for up to 24 months just isn’t feasable for most people which is why many find they’re unable to quality for formal approval.
Lending policies change regularly in this space
So you’re not a foreigner, Aussie expat or a first home buyer and your situation hasn’t changed: 18-24 months is still a long time for lending policies.
Bank appetite for off the plan units changes depending on supply and demand in the market.
In addition, what banks accepted just 12 months ago may not be acceptable to them by the time you come to apply for formal approval at settement.
For example, you may gotten pre-approval but now:
- The bank will not accept that default on your credit file.
- You need to provide a bigger deposit.
- The bank will not accept the deposit you paid as genuine savings, particularly if you did not save it over a period of 3-12 months.
- The lender will apply a higher interest rate.
Beware of property spruikers and seminars
When it comes to off the plan properties, it’s easy to get swept up in the slick sales techniques and marketing campaigns of property investment seminars.
Many people sign up to these events under the pretence that they will learn valuable tips and insights on buying real estate.
The reality is that they tend to be a huge sales pitch where property spruikers make grand promises about the fortune you stand to make.
These sales pitches start as brochures and pamphlets and then move on to emails and phone calls.
The high-pressure sales tactics reach their peak at investment seminars.
How to pick a dodgy investment seminar
In 2016, investigative journalist and real estate reporter Annabel Hennessy uncovered some of the more outrageous practices at so-called ‘free’ property investment seminars.
At one particular seminar, she was asked to put her hand through a block of wood, imagine that she was at her own funeral, give massages to attendees, chant and dance.
All of these activities are designed to amp you up and impair some of your rational thought.
Some property developers spend millions of dollars hiring marketing companies that understand the psychology of property investors and know how to get them to act.
Creating a sense of “fear of missing out” (FOMO) is one way.
If that doesn’t work, Hennessy found that some seminar hosts would tell personal stories of successful investors.
The problem was that some of these testimonials came from people who actually worked for, or were at least affiliated with, the developer or the education provider.
For all the stories of success, she found that the spruikers didn’t mention how much investors were in debt after buying into a development.
The investigation found that some sales contracts came with a time limit on special deals.
For example, if you signed the building contract now or before a certain time, you could get 50% off or a $10,000 discount on their next education course.
All of this is designed to pressure you into signing!
It’s always important to get independent financial advice before making any significant financial decision.
What can you do to protect yourself?
Try to read between the lines whenever anything is advertised as ‘free’.
If it’s free, ask them where they are earning their money and what their motivations are.
More often than not, they’re not financial professionals and they’re not providing financial advice – they’re there to sell.
Disturbingly, there are groups of financial professionals out there that work together to recommend each other’s services, giving you the illusion that you’re making an informed choice.
These professionals include developers, accountants, lawyers and solicitors, financial planners and even mortgage brokers.
The good news is that the Australian Securities and Investments Commission (ASIC) is working tirelessly to remove these individuals from the industry.
What you can do in the meantime is be vigilent, don’t believe everything you’re told and ask the spruikers:
- Why are you recommending this off the plan development?
- Who do you work for?
- Who are you affiliated with?
- Do you receive any benefits if I sign up to this contract?
Good news on sunset clauses!
Since November 2015, there have been significant changes to sunset clauses in New South Wales that you need to be aware of!
A sunset clause allows the seller (vendor) or you as the buyer to effectively cancel the off the plan contract if the property hasn’t been completed by a specific date.
The sunset date is chosen by the vendor and is usually set for 12 months ahead of the likely project completion date.
Although it was designed to benefit both parties, there was increasing concern by the NSW Office of Fair Trading that projects were being deliberately delayed to turn a bigger profit.
When the contruction passed the sunset date, there were reports of contracts being rescinded and then sold shortly after for a higher price.
Luckily, the NSW Government responded with an amendment to the Conveyancing Act 1919 (NSW) and now requires the developer to give 28 days’ written notice of a recission of a contract.
If you don’t agree to the recission or don’t respond to the notice, the developer will have to obtain an order from the Supreme Court to proceed.
The Supreme Court will take into account several factors such as whether the developer or vendor acted in good faith, the reason for the delay and whether the property has in fact increased in value.
It basically makes it harder for an off the plan developer to back out of a contract and take advantage of buyers.
It’s a win for both homebuyers and investors.
Still want to buy off the plan?
Here are some golden tips:
- Save as much as you can between signing the contract and settlement.
- Before signing the contract, consider asking your parents if they can act as a guarantor if you’re unable to come up with a larger deposit at settlement.
- Make sure you’re up-to-date with your financials for the purposes of verifying your income at settlement, particularly when it comes to your tax obligations as a self-employed applicant.
- Pay your mobile phone bills, rent and other debt facilities on time to avoid getting black marks on your credit file.
Need an off the plan home loan?
Please call us on 1300 889 743 or fill in our free assessment form and one of our mortgage brokers will help you to choose a suitable lender and loan product.