Financing Your Off-the-plan Purchase
Buying an off-the-plan property is a great way to enter the property market, but there are a few considerations you need to know about when it comes to financing a new purchase.
Buying an off-the-plan property is a great way for many first-time investors or first homebuyers to enter the property market.
There are many advantages to purchasing off-the-plan, despite the fact that your new home still hasn’t been built. Not only can you access possible tax benefits through depreciation, but you also get a brand new home with all the new fixtures and fittings.
Another key advantage is that you often only need to come up with a 10% deposit; however, the financing process has a few nuances that new buyers need to be aware of.
Have your finance in order ASAP
When buying off-the-plan make sure you have your finance in order as soon as possible. Submit your application up to four months prior to settlement. Once approval is granted, you will have to wait until the building is finished and valued before everything can be signed off and you can move in.
What is required in terms of LVR?
The LVR your lender requires depends on a few different factors. A key consideration is always based on whether the property is for an owner occupier or an investment. The size and location of the new building is also significant because if it is in a high-risk postcode or if the development has more than 50 units, this will impact the LVR requirements.
Generally speaking, the maximum LVR you would be able to access as an owner-occupier is 90/95% and 80-90% for investors.
Prepare for potential risks
One of the key considerations is that when you purchase an off-the-plan property you are having to sign the contract far in advance of moving in, which means there is a risk that lending policies might change between that time and final settlement.
Market conditions may also change, and the valuation of your new property, when completed, may come in lower than you anticipate. Be sure to have a buffer of cash, so you can settle even if the final valuation is on the low side and you aren’t able to access the full amount you need from your lender. It’s also important to note that failure to settle means you lose your 10% deposit.
Overcoming any hurdles
When purchasing a property off-the-plan, it is crucial to ensure that you are in a position to pass the servicing requirement for the total loan amount, at the date of settlement.
Having an additional buffer of cash available in case of lower lending or lower valuation is a good idea as well.
It is also essential to understand the area that you are looking to buy into. If the particular suburb has a large pipeline of new stock coming onto the market, then you might need to be careful as this could weigh on the final valuation when you are looking to settle.
An example of the process
When you have selected your new property, check that you can qualify for the loan amount required at settlement. Once the contract is signed, and a deposit of 10% is paid nothing further is required until nearer settlement. Then at least four months prior to settlement prepare the application for submission and make sure you have a cash buffer in place.
A great way to enter the market
Overall, buying off-the-plan property is a great way to get into the market, and at times you might even be able to access favourable lending terms with the help of the developer.
While there is some risk when it comes to gaining finance, given the time between signing the contract and final settlement, most of these risks can be overcome by fully understanding the process and planning for a final valuation that is in a range, rather than a set figure.
All information provided in this article is of a general or factual nature only and does not take into account your personal circumstances or objectives. Before making any decisions, you need to consider, with or without the assistance of a licensed adviser or broker, the appropriateness of any material presented in light of your individual needs and circumstances. The information in this article does not constitute a recommendation for any of the products or services provided by SMATS Services (Australia) Pty Ltd and or any of its related entities.