When you enter into a legal agreement to buy a property for a fixed price before it is complete and in most cases, before construction has even begun – that’s buying off the plan.
The most obvious benefit is that you are buying a brand new property, which is desirable for owner occupiers for obvious reasons – and for investors from a depreciation/tax perspective.
There are also numerous government grants and concessions that you may be eligible for which can reduce or waive the need to pay stamp duty along with having cash available at settlement. In NSW, stamp duty is completely waived up to a purchase price of $550,000, saving you a little over $20,000 along with a grant of $10,000 at settlement for a property purchase price of no more than $750,000.
Eligibility is determined on the facts and circumstances as at the commencement date of the eligible transaction – check with the Office of State Revenue to confirm.
Depending on the property cycle, buying off the plan also allows you to buy a property with todays’ price for a future value. You may for example, buy a property for $600,000 which once complete may be worth $650,000.
Buying off the plan allows you to buy now and pay later, as in most cases you would enter the agreement with a 10% deposit and nothing to pay until completion which could be two or three years away. This allows you to save more money and have a higher deposit and/or funds for furniture and other necessities.
From a finance point of view, one of the main risks of buying off the plan is the valuation of the property on completion. Property prices can rise and fall within this space of time and that change could affect your finances dramatically. As an example, if you bought for $600,000 in 2016 and the property is valued by the bank (which is generally a conservative valuation) for $550,000 in 2018, the $50,000 shortfall needs to be made up. The only solution is to either have savings to cover the difference or ask the bank for more money, which could mean attracting/increasing lender’s mortgage insurance and potentially a higher interest rate.
In addition, there could a number of changes with your personal circumstances within this space of time which could affect your borrowing capacity – higher financial commitments, relationship breakup, redundancy or having a child. As you have entered into an agreement with the builder, you are committed to buy the property on completion and if you cannot raise the finance, you may have to forfeit your deposit paid, along with other penalties which will cost you tens of thousands of dollars.
Due to the high volume of construction at the moment, most banks have a list of suburbs and developments which are classed as ‘high risk’ and are blacklisted for various reasons – due to oversupply of properties in the area or too much exposure from the bank already for example. This could present an issue obtaining finance on the property as some banks may require a higher deposit, i.e. 20% or even reject the security altogether.
In my experience
With my clients who have bought off the plan, I have always advised proceeding on the basis that they have contingencies in place like savings in case of a shortfall or knowing my clients have strong borrowing power.
I have also had a number of clients come to me having already exchanged on a property and who are close to completion and their bank declines the funding due to the risks mentioned above. Fortunately, due to the number of lenders I have access to along with my expertise, I have always managed to find a solution which allowed the client to proceed and not lose thousands of dollars.
The key to buying off the plan is to understand the financial risks and have a plan in place. Speaking to a knowledgeable mortgage and finance professional will allow you to discuss the risks and have a plan in place to reduce issues at settlement. _____________________________________________________________
Raj Ladher is a local expert on mortgages and financial matters. Originally from the UK, his consultancy firm is now based in Sydney.