Off the plan – things to consider

• The developer’s quality and ability to finance the construction are among the most significant uncertainties you will face.
• Not all developers can deliver the property to the standards you may expect and the timeframe you want, so you need to choose the developer carefully.
• If you are one of the first to buy in a project, you can often get a better price. You can also choose the best unit in the block.
• Working with a good solicitor will also ensure the contract protects you from potential changes.
• Valuation is an opinion and can vary, so if a valuation does come in short, you can choose to find a valuer who understands the value proposition of the specific property.
• Use our budgeting calculator to plan ahead.

How much can I borrow?

• 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.

When is the best time to apply?

• 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.

Who should and shouldn’t buy off the plan?

• SHOULD
  • High net worth investors.
  • Second home buyers.
  • Borrowers with a large deposit (more than 20%) and a high income.
• SHOULDN’T
  • First home buyers with a small deposit.
  • Foreigners and Australians living overseas (expats) as lending policy can change.
  • Self-managed superannuation funds (SMSFs).

Things NOT to do 12 months out from settlement

• 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 you’re 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.

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.
• 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 feasible 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 settlement. 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.

Still want to buy off the plan?

• 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.

Have you considered 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 hearsay.
• You should take into account your own financial situation and seek other professional advice before making an investment decision.

Property purchasing costs

• Minimum of 5% deposit
• Stamp duty
• Property title transfer fee
• Registration fees
• Conveyancing fees
• Inspections including building/strata and pest
• Home loan set up fees
• Lenders Mortgage Insurance (LMI)

Property selling costs

• Agent Fees
• Marketing Costs
• Conveyancing Fees
• Capital Gains Tax (CGT)
• Presale Repairs and Renovations
• Styling/ Home Staging
• Auctioneer’s Fees
• Lender Fees
• Moving Costs