Getting a mortgage for an off-the-plan property
Rapid development in our major cities has made buying property off the plan more common than it once was.
There can be plenty of upsides to signing a contract before a dwelling is completed and its title registered. They include stamp duty concessions, depreciation allowances, the opportunity to customise your new pad, a warranty to ensure you won’t cop surprise repair bills, and the chance the value of the property might rise in the interim.
But getting – and keeping – finance for an off-the-plan purchase is not always a simple matter and there can be pitfalls for new players, according to Virtual Legal CEO and conveyancing specialist Katie Richards.
The rush to sign
If the apartments you’re eyeing off have an attractive specification and are well situated, there’s a fair chance they’ll be over-subscribed when they hit the market. “Often people are nervous about not getting the place they want and marketeers can pile that pressure on,” Richards says.
“It might be tempting to rush into a contract to secure your dream home, but that can be a costly mistake if you haven’t done a proper assessment of your finances first.”
It may be possible to get a mortgage pre-approval before you sign on the line, but be aware it would only be valid for 90 days at the most so could lapse before the completion date. Especially if you’re buying into an early stage development, Richards warns.
It’s important to note that you will need to demonstrate your income, assets and creditworthiness to your chosen lender all over again when full approval is applied for approaching the settlement date.
Change of circumstances
Given some off-the-plan properties take several years to complete, that may not be a simple matter. A change of circumstances during that time, such as a new job or a new baby, may make a mortgage more difficult to obtain, or some institutions may reduce the amount they’re willing to lend.
The other risk of buying into an early stage development is a possible decline in the value of the property prior to completion, which can affect the likelihood of obtaining the loan required.
Fail to lock in a loan by the settlement date – usually 14 days after you’re notified the title has been registered – and you stand to lose your deposit. Worse still, you are likely to be in breach of contract and could be hit for the difference between the price you signed for and the resale price, plus legal and selling costs, if the developer decides to play hardball.
Working with a broker can make it easier to secure finance in a tight timeframe.
“Banks may not be able to move as fast if you deal with them directly,” Richards says.
“Brokers typically understand how to prioritise or escalate your finance application with a lender and can keep things moving behind the scenes.”
Something in reserve
Not over-extending yourself financially is wise, given the uncertainties inherent to the process.
In a worst-case scenario where the bank changes your lending approval conditions, you’ll ideally have an extra 10 per cent in your kitty or a guarantor willing to step in.
“Some people can borrow money from friends and family to tide them over, but others are on their own with no back-up,” Richards says.
“If they’ve stretched themselves and can’t afford any variation in a finance approval, then they can end up in a difficult position if things change.”
Buying a dwelling off the plan is a big step. Your Smartline Adviser works with over 25 different lenders to provide access to finance in a range of different situations, including off the plan.