You were thinking about buying an established property, but now you’re thinking an off-plan purchase might be the way to go. You’re buying a house either way, so it’s pretty much going to be the same thing, right?!
Actually, not quite…
The requirements for finance (and the loan structure) can vary depending on the type of property transaction.
Here we outline the different types of property transactions you might be considering.
Buying an established property via private treaty (i.e. non-auction purchase)
We generally suggest having a pre-approval in place before making an offer on a property because a) you want to be confident a lender will approve you for a loan first and b) having a pre-approval in place can speed up the Formal Approval process once you’ve had an offer accepted.
Making your offer ‘subject to finance,’ will give you time to obtain Unconditional Finance Approval before you exchange on a contract. That way, you’re only signing the contract and officially committing to the purchase AFTER a lender has Fully Approved your loan. It also means that if (for some unforeseen reason), you can’t secure Unconditional Finance for this property, you’re not at risk of losing your deposit since you haven’t signed the contract or paid your deposit yet.
Buying an established property via auction
If you secure a property with the winning bid, you will commit to the purchase – i.e. sign the contract and pay your deposit – on auction day. This means you need to be confident the contract is ok from a legal perspective. You’ll also want to be pretty confident that a lender will lend you the funds you need to complete the purchase. Which is why we strongly suggest having a pre-approval in place before auction day.
You can find more information about auctions and how to prepare for one here.
Committing to an off-plan purchase
An off-plan purchase is quite different to buying an established property because you commit to buy something today (i.e. you sign the contract and pay your deposit), but don’t have to pay for it (or apply for finance) until the property is almost complete.
Given the fact that off-plan purchases don’t generally settle for up to 1-2 years after you sign the contract, any pre-approval would lapse before the expected settlement. This means that most buyers exchange on an off-plan purchase without being pre-approved.
However, to ensure you’re not risking your deposit, you’ll want to ensure you can service the proposed loan for your off-plan purchase as of today. You should also have the funds required to complete settlement (or be well on your way to saving them).
Performing this servicing exercise relies on today’s lending policy, today’s interest rates and today’s servicing criteria – which are all subject to change between now and when you would need to apply for your loan.
There’s always an element of risk involved with an off-plan purchase, because you’re banking on the fact you’ll be able to secure finance when you need to. Having said that, it can be a good way to secure a property at today’s prices though, providing you’re confident you’ll be able to secure finance when you need it.
Here are some of our blog posts about off-plan purchases and things to watch out for:
Buying vacant land – with the intention to build soon
We wouldn’t suggest buying a vacant block of land if you don’t have the capacity to also secure lending for your build. Otherwise, you’ll be making repayments on a vacant block that you won’t be able to do anything with.
This means that when you’re exploring finance options to buy land, you’ll also want to have an idea of how much the build will cost. That way, we can run the numbers to ensure it’s possible given your financial position.
Whether you’re exchanging on the land contract with a pre-approval or Unconditional Approval will depend on when the land is anticipated to settle.
In some cases, we’ll also suggest having a pre-approval in place for the build, although this will depend on the expected settlement date of the land, as well as requirements of your specific lender.
Buying a house and land package
This type of purchase requires yet another approach to finance, dependent upon how the contract is structured.
Often the land will settle first and you’ll start making repayments on the land loan component. Then as construction commences, the build loan component will be drawn down as progress payments – in accordance with various stages of the build.
The timing of your cash contribution (i.e. will you contribute it all at land settlement or some at the land settlement and the rest at the build stage?) will depend on your specific land and build proposal.
If you already own land and you’re getting ready to find a builder and/or finalising the build contract, here’s a few things to keep in mind.
Regardless of the type of property you plan to buy, it’s always better to speak to us as early into the process as you can. That way, we can help to ensure you’re as prepared as you can be, from a financial perspective and not taking on any unnecessary financial risk.
