Buying Off the Plan
Some home buyers are considering buying a brand-new property even when there’s nothing concretely built yet. This is called buying off the plan, and it’s become a popular choice because home buyers often enjoy significant discounts when choosing this purchase while projecting capital gains after a few years.
Are you considering putting money down while the property is still under construction? While it offers certain advantages, there are always potential drawbacks.It is a riskier proposition than a move-in ready unit or home – so let’s find out if buying off the plan fits your home-buying needs, current finances, and long-term goals.
What does ‘buying off the plan’ mean?
Buying off the plan involves entering a contract to buy a property still in the planning or building phase. Off the plan could be vacant land, house and land packages, and strata properties.
When you identify a new development, you get to review the location, plans, specs, and available artistic rendering before deciding to buy.
Once the home buyer is satisfied with the project, he or she signs a contract with the developer. This contract outlines the terms, purchase price, repayment, expected completion date, and special conditions. Usually, an off-the-plan property requires at least a down payment of 10%, but this will depend on the developer.
Buying off the plan is quite popular during a rising market because you can access discounted rates. And if all goes well, you can expect capital gains because once the residence is built, it will have risen in value.
However, some experts advise against it, because the valuation could change after a few years and be even lower in a market downturn. Buying off the plan is also riskier, as you are parting with your deposit before a single brick is laid. Anywhere from a shortage of building materials to tradespeople could easily delay construction and completion dates.
How much can I borrow?
Obtaining financing for an off-the-plan property will differ slightly from a standard home loan.
For one, you are presenting lenders with the development plans or contract before they can grant the loan. Lenders tend to view off-the-plan purchases as riskier, as the value may drop when the unit or house is completed. Therefore, they often require a 20% deposit if you decide to buy off the plan.
What’s more, the valuation in an off-the-plan project is done upon completion, which can take 12 months or more for a house-and-land package, and up to 3 years for a tower block apartment.
Because of the timeline, banks may use the market value rather than purchase price when calculating your loan-to-value ratio (LVR) and if you need Lenders Mortgage Insurance (LMI).
So, an off the plan buyer could face much higher borrowing costs at the time their lender conditionally approved the loan, but then have lower valuations.
What are the advantages of buying off the plan?
Potential capital growth – Buying off the plan allows buyers to secure a property at today’s price, potentially benefiting from future capital growth. As the property market evolves, there is a chance that the value of the property will increase by the time it is completed, potentially resulting in a higher return on investment.
Customization and modern features – Off-the-plan properties often come with modern features, energy-efficient designs, and the opportunity to customize certain aspects of the property, such as color schemes or finishes. While space in strata properties may be smaller, the features appeal to buyers seeking contemporary living spaces.
Stamp duty savings – In some states or territories, buyers may be eligible for stamp duty concessions or savings when purchasing off the plan. This can significantly reduce the upfront costs associated with buying a property.
First home buyer benefits – First home buyers may also benefit from government incentives, such as grants or additional savings schemes, specifically targeted at purchasing off-the-plan properties.
What about the disadvantages?
Uncertainty and delays – Buying off the plan involves a level of uncertainty, as the final product may differ from the initial plans or artist impressions. Construction delays are also possible, which can affect the expected completion date and potentially impact the buyer’s plans.
Housing market risks – The property market can fluctuate, and economic conditions can change during the construction period. For instance, lower-density housing options are now preferred over packed units in buildings, and interest rates are higher now. While there is the potential for capital growth, there is also the risk that the value of your property is lower once completed.
Limited room for negotiation – When purchasing off the plan, buyers often have limited room for negotiation on the purchase price or contract terms. Developers typically set the prices based on market conditions and their financial objectives. Lenders also consider these loans higher risk.
Risk of unsatisfactory build – Buyers rely on plans, artist impressions, and display suites to visualize the property since physical inspections are limited during the construction phase. It can be challenging to assess the quality of construction and finishes until the property is completed.
Changes in personal circumstances – Buyers’ personal circumstances may change during the construction period, such as a job relocation or financial circumstances. These changes can make it difficult to proceed with the purchase, and exiting the contract may involve penalties or additional costs.
Sunset clause protects home buyers
In the context of buying off the plan, a sunset clause refers to a provision or condition included in the purchase contract that sets a deadline for the build completion.
Developers are now required to give 28 days’ written notice of a recission of a contract. If the home buyer does not respond to the notice, they would have to obtain a Supreme Court order – proving they acted in good faith, there is a valid reason for the delay, and that the property is indeed priced higher.
It serves as a form of protection for buyers by providing a timeframe within which the developer must finish the construction and deliver the property.
Is an off the plan home right for me?
An off-the-plan unit or home has its incentives, but the fact is, it will only suit certain types of clients.
If you are comfortable putting up a 20% deposit and have a consistently high income for repayments, are in no rush to move in or have it rented out, and if you are already eyeing your second property, then an off-the-plan may be ideal.
However, those who are first-home buyers with over 80% loan-to-value ratio (LVR) who may want to move in immediately should opt for an existing home. In addition, foreigners or ex-pats, as well as investment property borrowers that handle self-managed super funds (SMSFs) may want to consider other property types.
An off the plan property may have been popular around 18 months ago when prices in a good real estate block go up at every stage. But in today’s climate it might cost you more in the long run.
Still want an off the plan property? Talk to us
Buying off the plan is an increasingly popular option for property buyers in Australia. It involves purchasing a property, typically an apartment or a house, before it is completed or even constructed. While this approach offers certain advantages, it also carries some drawbacks.
When you work with our mortgage specialists, you have the right support and financial insight needed to realise your investment or residential goals. We take a no-nonsense approach to your home loans and investment property loans and support you every step of the way.
