BUYING OFF THE PLAN: What can go wrong and what you can do about it
So, you've spoken to your adviser and after due consideration and research you have decided that an investment property is your next step...congratulations!
You speak to our property experts and decide on a property, but it is "off the plan". That is to say, construction on the building into which you are buying has not yet begun or is not completed at the time you purchase your property. This means that settlement of your property purchase is likely to be a year or more after you sign the purchase contract.
You may ask, "What is different about buying an off the plan property compared to buying an existing property?"
There are a couple of important differences that you must be aware of to ensure that your purchase makes it to settlement without a hitch.
In both cases, before committing yourself you would speak to your Hudson finance manager to determine whether you can obtain the necessary lending for this property. The lender will determine whether you can service the property NOW.
Here is the first difference - When buying off the plan, what needs to be considered is whether you can service this property in a year's time or two year's time. This is what we look at when helping you to find the best loan product for your off the plan property.
The next main difference is the terms of the Contract. When purchasing an existing property your Contract is usually subject to a 10% deposit and a finance clause. In order to meet these clauses you obtain an Unconditional Approval from a lender for the property and you pay the 10% deposit. Once this has been done the Contract of Sale goes unconditional. This means that you are now locked into that contract for settlement.
With an off the plan property, the Contract is subject to the same clauses generally but because it is off the plan the lenders cannot issue an Unconditional Approval for the lending - they can only issue an Approval In Principle. This means that given your circumstances at the time of applying they would approve the loan as long as the valuation on the property is at the right level and, if mortgage insurance is necessary, that the Mortgage Insurer would approve the loan. Once the Approval in Principle has been granted and you organise the 10% deposit (via cash, Deposit Bond or Bank Guarantee) then once again the Contract itself goes unconditional and you are locked into this contract.
If you do not have the finance clause put in the contract or you waive the finance clause you will end up in the same position.
Here comes the danger when buying off the plan: If your circumstances change between the time that you obtain Approval in Principle and settlement, then you may not get the lending that was originally approved in principle.
Changes that could affect your Approval in Principle include...
- Changing your job within three months of settlement
- Leaving your job entirely
- Spending savings that are included as assets in your application or tying the money up in other investments
- Changing your lending; for example taking out a personal loan or increasing your home or investment lending without discussing it with the lender or your broker
Here at Hudson's Finance Division we like to get the ball rolling on your finance for an off the plan property as early as three months prior to settlement so that if any of the situations above occur we have time to look at your alternatives. So far in all cases that we have dealt with we have managed to secure alternative lending.
Depending upon what that alternative is and the lender that we then must go through, you may end up running over time on settlement and incur default or penalty interest.
So what can we learn from this?
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It is important to use a reputable finance broker or lender that actually understands the process of off the plan financing, because even within the banks a lot of the staff have no idea about this process. |
2: |
It is important to make sure that if rates rise you can still service the loan within the lenders criteria. |
3: |
Do not take out any further lending without first discussing this with your lender/broker...you may be okay but then again you could jeopardise your property purchase. |
4: |
Do not change your job unless it is absolutely necessary within three months of the property settling. But if circumstances do change you MUST let your lender/broker know and see what can be done. |
5: |
If a set amount of savings is required ensure that it is THERE in the format needed – not lump sums from taxation returns etc - you need to clarify this with your lender/broker and do NOT count on an increase inother property valuations or gifts etc. |
As you can see there is a lot to consider when buying a property at any time but especially when buying off the plan. Here at Hudson's Finance Division we understand this process and work with it on an on-going basis.
We understand what your solicitor needs to do, we understand what you need to do, we understand what the lender needs to do and we can bring all of these aspects together and help you through this process.
Speak with your Financial Adviser or Finance Manager on freecall 1800 804 296 about this in more detail, or make a time online now.
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