What is buying ‘Off-the-Plan’?
Buying off-the-plan means you are buying a property (and signing the contract) before the property is built. You have no actual property to inspect at the time you exchange on the contract and you commit to the purchase based upon the plans, inclusions and of course the price of the property.
Here’s some of the reasons why many of our clients have chosen to purchase properties off-the-plan in the past.
Opportunity for capital growth – buy at today’s prices
With property prices steadily rising over the years, there was a good chance that if you bought off-the-plan, the property will increase in value over the time it’s built.
For example, you buy an apartment off-the-plan today at a price of $350,000. If property prices increase over the next two years as the property is built, upon settlement your property could be worth $365,000. But you only had to pay $350,000 for it.
The capital growth has occurred before you’ve paid anything more than the deposit.
It’s important to realize that the ‘opportunity for growth’ does not always translate to ‘actual growth.’ As with anything, the price (or value) of your apartment at the time of settlement will be affected by the market– i.e. supply vs demand.
If 200 apartments within a new development all settle at the same time, there’s likely to be portion of these that are on sold on settlement. Perhaps the developer didn’t sell them all initially, some investors bought them specifically to ‘on sell’, and some owner-occupier buyers purchased a property in the meantime because construction took too long.
Even if property prices have increased over the construction period, if there are not enough buyers willing to pay $360,000 for the new apartments, there’s a risk that the perceived capital growth is not realized. When a limited number of buyers have many apartments to choose from – all of which are in the same development and essentially the same – it’s easy for the price to be driven down.
Owning an investment property provides some great tax advantages and depreciation is one of them. Investors like to purchase brand new properties because the depreciation benefits are greater when compared to older properties.
A Quantity Surveyor will conduct an inspection of the property to assess the cost of capital items (for example, hot water systems, carpets, door and window fittings) and then prepare a Depreciation Schedule advising how much you can claim each year for depreciation. Calculations are performed using a sliding scale, meaning that you can generally claim more in the first few years when the items are newer.
When you purchase off-the-plan, you sign a contract today but don’t have to pay anything (other than a deposit) until the property is complete. In some cases, this can be up to a few years away.
This has been a great benefit in the past because it can give you more time to save for your entire contribution. Buying off-the-plan can sometimes act as an enforced savings plan for First Home Buyers who have the income but need an extra little motivator to ramp up their savings.
So, is how does buying “off-the-plan” fit in with all the lending changes we’ve seen recently?
Whilst an off-the-plan purchase is a strategy you may wish to consider for your next property purchase, we feel that it now carries greater risk. This is due to the significant changes we’ve recently seen to lending policy across the board.
When you exchange on an off-the-plan contract, you are effectively saying…
“Yes. When the property settles, I can afford to buy the property and I’m confident a lender will lend me the money to do so.”
Regardless of whether you have a pre-approval in place at the time of exchange, this is becoming an increasingly difficult to say.
Over the last few months, there have been SIGNIFICANT changes in the way lenders assess a borrower as suitable (or unsuitable). There have also been SIGNIFICANT changes as to how much lenders are happy to lend. There have also been SIGNIFICANT changes as to which lender is better suited to which situation.
In fact, some loan applications that were approved 3 months ago would be declined if they were presented to the lender in the same way today. Things have changed so much so quickly and no-one is sure how further lenders will go to tighten their policies under APRA’s guidance.
We are not saying that all off-the-plan purchases should be ‘off-the-table,’ but we do feel they require a lot more consideration than once previously.
If you are currently thinking about an off-the-plan purchase or you have already committed to one, it’s important to talk to a mortgage professional sooner rather than later.
It’s important to understand all your options and there may be things that we can do right now to help minimise the risks at settlement.