Buying off the plan financial must knows
So you’re thinking about buying off the plan. That’s wonderful! The anticipation of waiting to see your new home or investment property come to fruition would be part nerve-wracking and part-exciting at the the same time. But, will it be as spectacular as the artist’s impression? Will it be as spacious as you initially thought? Will the builder commit to construction till the very end?
Here we'll explore these questions and more, so hold onto your deposit to ensure that buying off the plan is the right way to invest your money.
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How do I know if buying off the plan is right for me?
Buying off the plan may seem pretty straightforward, but there’s a whole lot you’ve got to consider first - far beyond the regular purchase sale or auction of a house or unit.
Some of the questions you need to ask yourself include:
Can I afford to put the deposit down now?
When buying off the plan, developers will need a deposit from you to help pay for their construction expenses. But unlike a regular property purchase at sale or auction, you may have to wait several months to a couple of years before completion, depending on which stage you show interest in the development.
Deposit amounts are not regulated and can be anything from 5-20%. Some developers will allow you to negotiate the deposit amount, but the real question is: Can you afford to throw in $120K of your hard earned cash while waiting for construction to finish, stalling the possible sale of your current dwelling or wasting money on rent? Other thought-starters you may want to consider include:
- If it’s an investment property, can you afford to forego the down payment for a year or two without reaping the rewards from your investment a lot sooner?
- If purchasing a home of your own, can you afford to pay rent elsewhere until the completion of your new home?
- If you’re selling your current dwelling to pay for the new one, can you afford to wait a couple of years before completion of an off the plan property?
- What if the developer pulls out of the project?
- What will happen to your deposit and your plans?
- There’s a risk that the end result differs to the artist’s impression and that you won’t be fully satisfied. Developers are usually crafty in the clauses they set up to protect them of buyer disatisfaction. Are you willing to take that risk?
Although these are just some things you need to consider before committing yourself to an off the plan purchase, with the right advice plus hours of your own research, hopefully you make an informed decision to which direction to take. Let’s get you thinking about some more important off the plan must knows.
What’s LVR and how will it affect me?
LVR stands for Loan to Value Ratio and is the amount of money you borrow for your home loan compared to the actual value of the property. When buying off the plan, lenders will use LVR to assess combination your borrowing capabilities and the potential value of the property after completion - it’s basically a formula that helps them see if you’re a good candidate for borrowing in the first instance and whether your intended investment is worth the spending dollars.
Let’s look at LVR another way - if you put 10% deposit down on a $900K apartment, and the lenders can foresee that the property due to factors like location and precedent sales in the area is only worth $800K after completion then they may assess that your intended off the plan purchase may not be a good purchase. The bad thing is, the lender may initially give you confidence to make the purchase in the first instance and put your deposit down, but if the value of the property drops at the time of completion and when you’re ready to borrow the balance of your loan, they have the right to limit the amount they lend you.
Bottom line? If the value of the completed property drops from the initial off the plan purchase price, the lender may restrict your borrowing power if they see your property as a risk.
What if the lender changes the amount I can borrow at completion of construction?
Let’s be honest, you’ll be very stuck. Depending on how the lender assesses the value of your property after completion, they may bump up the initial 10% deposit requirement to 20%. Let’s hope you’ve been saving all this time for a rainy day, because guess what? That rainy day just might storm in your backyard.
You’ll either need to dig in deep to find the balance, find the shortfall somewhere else, or forfeit your deposit altogether. Losing your deposit is not ideal in any circumstance. You’ve worked hard at saving for that! Here are some options to consider if your lender cuts you short:
- Ask a family member, friend or parent to be guarantor for the shortfall
- Make an appeal with your lender
- Ask another lender to tailor a solution for the shortfall or even the full amount
- Better still, after you pay your initial 10%, aim to scrape and save an additional 10% before completion of your off the plan investment - just in case.
Tips on meeting essential LVR requirements
To save yourself the nasty surprise of your Loan to Value Ratio requirements changing, here are some tips to hopefully take you over the finish line:
1. Research the area: is the area you want to invest in tipped to see growth in the short term? In the long term? Or are you paying too much in the first place with little room for growth?
2. Smaller blocks vs Larger blocks: let’s see...the smaller the block the smaller the expenses. It’s obvious to see that lenders will favour funding your apartment within a smaller construction project compared to a larger one. The smaller the construction means that future problems are more manageable too. Basically, lower maintenance all round.
3. Research the developer: before putting down your deposit, check out the history of the developer. Do some googling, speak with your lender and see if your potential developer has a good enough reputation to invent in in the first place. Last thing you want is to invest blindly.
4. Save Save Save: If you’ve only just purchased an off the plan property, chances are it still has a few years until completion. So use this extra time up your sleeve to begin putting money aside, so by the time settlement rolls around you’ve got a decent deposit saved up. For instance, if you’ve purchased an off the plan worth $600,000 and put down a 10% deposit of $60,000, you may need to save up an extra $60,000 before the building is finished to have a deposit of 20%. Plus you’ll also need to save for the cost of stamp duty, which in NSW will be around $22,000 on a $600k property.
5. Use your equity: an alternative option for investors that already own a property is to use a portion of your equity as security for the loan, which will mean you won’t need a deposit to take out the loan. But keep in mind, you’ll still need to cover the other upfront costs like stamp duty, registration fees and the home loan application fee.
6. Get a guarantor: have you thought about asking a family member to go guarantor? Not the easiest thing to do, but if you don’t have any assets to use as collateral for the loan, you could ask your parents to become a guarantor on your loan, which would mean a portion of your guarantor’s home would be used as security and you wouldn’t need to come up with the full 20% deposit. While some lenders may allow another family member (e.g a sibling) to go guarantor, they will usually require a non parental guarantor to own a percentage of the property you’re purchasing.
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