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Planning for your ‘Off-Plan’ purchase

off-plan purchaseWhether you’re buying a property as your first home or purchasing an investment property, purchasing off-plan is a common way to achieve both these objectives.

Over the years, we’ve assisted many clients purchase off-plan properties and have published posts about this buying strategy here and also here.

However, due to changes in the lending environment – and some recent instances where clients have experienced difficulty obtaining finance for their off-plan purchase – we wanted to revisit this way of purchasing to remind you of the importance of having an adequate ‘back-up’ strategy to minimise the risks involved.

When you commit to an off-plan purchase, you’re agreeing to pay for the property at a future date. This means that when the property is near completion, you will need to apply for finance and be ready to settle on your purchase. Since you don’t know exactly when this date will be – or more importantly what lending policies will be in place at this time – you need to be confident you’ll be approved for finance when settlement is expected. In other words, when the property is completed, your financial position needs to be strong enough for a lender to approve your loan.

There are two parts to this.

First, you want to ensure a lender would lend you the funds now. Whilst lending rates, borrowing policies and servicing criteria are likely to change before you end up applying for the loan, knowing you’re eligible for finance as of today, is a good start.

Second, since it’s impossible to know how lending policy and serviceability will change between now and the time you end up applying for your loan, we suggest you look at the factors you *do* have control over (or the things you can predict) that will impact your financial situation.

We take a look at these here.

 

Change of employment/ employment security

Things like having a complete career change, moving to a non-permanent position, considering a consulting/ contracting role, reducing your hours or even changing employers can impact your eligibility to secure finance. Even if you start a new full time permanent job in the same industry, being in a ‘probation period’ at the time you apply for your loan can be an issue for some lenders.

And whilst it’s not something you can generally plan for, a sudden redundancy close to settlement could see you failing to secure the finance required. If you’re unable to secure finance and unable to on-sell the property, you may end up forfeiting the deposit you’ve already paid.

 

Change to your asset and liability position

When a lender assesses your capacity to qualify for finance, they will assess your asset and liability position. This means that if you end up spending your cash on a holiday and/or take out a personal loan to purchase a car, you may have reduced your ability to secure a loan.

Also, if you intend to borrow more than 80% of the property value, many lenders require you to adhere to a “Genuine Savings Policy.” This means that 5% of the purchase price must be held in your personal bank account for a continuous period of 3 months prior to lodging an application for finance. This may be something you need to be aware of – and plan for – as your property nears its completion date.

 

Changes to Property Values

The lender will base the loan amount on the lower of the purchase price or the value of the property (which is determined by a valuer at the time the property is complete). This means that if the property is valued lower than the price you paid for it, you may end up having to contribute a larger cash sum on settlement since you can’t quite borrow as much as you had originally planned.

 

Family changes

If you’re anticipating any changes to your household – i.e. the addition of a new baby or even a separation – you need to consider how this may impact your financial position and ability to secure finance

 

Our advice for off-plan purchases

Having the above mentioned events occur is not necessarily a deal breaker. It all depends on your personal situation and your capacity to cover the proposed loan repayments, in light of the changes to your financial circumstances.

Regardless of whether you anticipate financial changes, it’s a good idea to a) have more-than-adequate cash reserves available or b) access to additional funds if required.

That way, if servicing rates increase or lending criteria tightens or property values fall meaning you can’t quite borrow as much as you had hoped, there’s a good chance you can still settle on your purchase.

The other thing we recommend is talking to us sooner rather than later. Most clients will talk to us before they exchange on an off-plan property.

However, if you have already committed to an off-plan purchase and have not spoken to us, don’t wait one month out from settlement before contacting us because there may be things you need to do now to increase your chances of being approved for a loan in a few months from now.

We’re here to help.

 

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