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Tuesday, 25 April 2017 22:02

Pros and Cons of buying Off the Plan

Off the plan properties can look appealing. I get it! I find myself gazing into the brochures and television adverts– getting lost in the wonderful images of happy families feeding ducks in the park. The young, urban hipsters holding their freshly brewed, single origin lattes in the funky café that will open in the new development.

Are off the plan properties a good purchase? It’s a tough question with no right or wrong answer.

This article provide a rundown on the pros and cons of purchasing off the plan properties from my personal point of view. As always, please carry out your own due diligence on any property purchase that you’re considering.  My thoughts are general in nature and are based on my own experiences and those of some of my clients.

What are some of the positives of purchasing off the plan?

Your property could be worth more than you paid once it’s completed

If you’ve bought into a market that’s experiencing an upswing in growth then you might find yourself owning a property that’s worth more than you paid once it’s completed.  Whilst this is rare -  I have seen this occur with clients. Particularly those that purchased in Sydney before the recent upswing in prices – as well as some areas of Canberra.

When this does happen – there are a few lenders that will consider the value of the property (rather than the purchase price) when deciding how much they are willing to lend. This can be great if you’ve only got a small deposit because the increased value may mean you avoid paying Lenders Mortgage Insurance (LMI).

Higher depreciation

When a brand new property is purchased as an investment property – the owner might be able to claim a higher level of depreciation on fixtures and fittings as a tax deduction compared to an older property.

First home Buyer benefits/concessions

Most states and territories provide some sort of concessional duty for First Home Buyers purchasing a new property. They usually provide a First Home Owners Grant as well. Check out what’s available in your area by getting in touch with your local State Revenue Office.

Lower repair costs

In theory – if the property is new then there shouldn’t be as much need for immediate repair which will save you some money.

Getting into the market with a relatively small deposit

This can be appealing – especially for first home buyers. You can get into the market now for a relatively small outlay of 5% or 10% of the purchase price – and then you’ll have the time between paying your deposit and settlement to continue to add to your savings and thereby reduce the amount you need to borrow.

What are some of the negatives of purchasing off the plan?

Valuations coming in lower than purchase price

The single biggest risk with off the plan properties is valuations coming in lower than the purchase price. When this happens – the bank will lend against the valuation result rather than the purchase price.

This means that the borrower will need to contribute a larger deposit to get finance approved. If they can’t contribute a larger deposit then they might have to pay LMI as the best result -  or possibly forfeit the purchase and lose their deposit (as the worst result).

The bank won’t approve your loan until the property is built

Normally when purchasing a property you can make your offer “subject to finance” (unless it’s an auction purchase). This enables you to carry out your building/pest inspection and apply to the bank for finance approval.  Once finance approval has been issued you can go unconditional on the purchase and pay your 10% deposit.

With off the plan properties you don’t have that luxury because the bank won’t approve your loan until the property is built and they can carry out a valuation. Therefore, in this instance – you pay your 10% deposit upfront (without getting finance approval from the bank) and then apply for bank approval when the property is finally built.

As you can see – this can be risky. What if the bank doesn’t approve your loan once the property is completed?

You’re probably now asking “but can’t I get a preapproval?” If the anticipated completion date is within 3-6 months of signing the contract then you might be able to obtain a pre-approval from a lender but they will still require a valuation be completed on the property once it’s completed. They will also want to see updated supporting documents to verify that your income/liability situation hasn’t changed since the pre-approval was issued.

Time frames can blow out

Off the plan properties aren’t always completed on time.  The proposed finished date is only an initial estimate and it’s not uncommon for the expected completion date to be extended by months (possibly longer). This can be a good or bad thing – if it’s an investment property then the extra time might be welcomed as you won’t be making any interest repayments on the loan until you settle. If it’s an owner-occupied purchase then you’ll probably be keen to get into your new home sooner rather than later.

Higher Price

Just like a new car or any other new product – a new property generally commands a higher price. Just like that new car or product – the value tends to take an initial dip once that shiny newness wears off.

Have you decided that off the plan is the right option for you?

All in all – if you’ve decided that purchasing an off the plan property is the right option for you then to mitigate risk, from a finance perspective, I would:

  • Aim to have a large deposit to contribute to the purchase just in case the valuation comes in low once the property is completed. At a minimum – I’d aim to have a 20% deposit to contribute but I also understand that this is no easy feat. Especially for those saving for their first home in one of the capital cities;
  • Have a mortgage broker assess your current situation and give you an idea of whether you’re likely to present a strong application in the future. Keep in mind that they can’t guarantee you’ll obtain finance approval once your property is completed – but they should be able to give you a reasonable idea;
  • Ensure that the internal living areas of the property are larger than 50m2. Most banks are ok with 50m2 or above – whilst only a few have an appetite for anything with less.

 I hope you’ve found this information helpful. If you have any questions at all - feel free to get in touch.

Jamie 

About the author: Jamie Moore is an active residential property investor and owner of Pass Go Home Loans. If you’d like to have Jamie provide advice on your finance structure and investment strategy, simply complete and return this FORM and he will be in touch - this is a FREE, no obligation service. This information is of a general nature – please always consult taxation professionals about the specific nature of your situation.

Pass Go Home Loans Pty Ltd
Australia Wide Mortgage Broker
This email address is being protected from spambots. You need JavaScript enabled to view it. | www.passgo.com.au | 1300 656 299

 

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Mortgage brokers offer variety – banks are limited to their own products

When you walk into a bank – they are limited to providing advice on their own products.  They aren’t able, or willing to tell you, that there could be a better offer down the road with their competitor. On the other hand – most brokers typically have a large number of lenders they are accredited with. For instance – at Pass Go we currently deal with 20+ lenders including all the Big 4 banks – so we have access to hundreds of different loan products.  At Pass Go - we also get preferential treatment with some lenders due to the high volumes of business we do. This often includes lower rates, reduced fees and quicker turnaround times for our clients.

High level of expertise – and possibly a higher chance of approval

A high performing broker will know the ins and outs of lender policies. They’ll be familiar with certain niche policies and have a good understanding of how to structure complex deals. It goes without saying – it’s likely that your chances of getting a loan approved are greater when using a high performing broker with access to many lenders rather than approaching one bank who can only advise on its own products and policies.

Good mortgage brokers stick around - we’re here for the long term

Mortgage brokers aim to please.  We want you to rave about our service and refer your friends and family – we aim to provide an outstanding experience from the start and continue that service for the life of the loan. For instance – for Pass Go clients, if there’s something they require with their loan, they can expect to get a prompt response from the broker that set up their loan. With banks – this isn’t often the case. You’ll contact their generic helpdesk number and deal with whoever happens to pick up your call.

This is an important factor particular for our investor clients – they take comfort in knowing that we’re not just focussed on the one transaction. We’re here to work with them over the long-term – whether they purchase a couple of properties or 10.

Saving you time and money

An efficient broker will listen to your requirements and then present a recommendation on which lender to go with. Once you’re happy with that recommendation they’ll request your supporting documents (payslips, ID, etc.) – get your application processed, submitted and do all the following up on your behalf. Not only does this save you time but also the hassle of dealing with banks!  To top it off - most brokers (including Pass Go brokers) do not charge you an upfront fee for our service. Instead – the bank that you get your loan with pays us a commission from introducing your business.

Jamie Moore

About the author: Jamie Moore is an active residential property investor and owner of Pass Go Home Loans. If you’d like to have Jamie provide advice on your finance structure and investment strategy, simply complete and return this FORM and he will be in touch - this is a FREE, no obligation service.

This information is of a general nature – please always consult taxation professionals about the specific nature of your situation.

Pass Go Home Loans Pty Ltd
Canberra, Australia
This email address is being protected from spambots. You need JavaScript enabled to view it. | www.passgo.com.au | 1300 656 299

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