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New home sales are on the rise, fuelled in part by many investors and owner-occupiers buying off the plan. The concept is straightforward: put up a deposit (usually 10 per cent) to help the developer fund the construction and pay the balance when the build is complete. Apartments are now springing up at a rapid rate in capital cities and popular holiday locations with the confidence that property prices will rise, handing buyers a tidy capital growth when they eventually take possession.
Developers sell off the plan to entice as many sales commitments as possible to then secure from their lender the finance they need for the build. Because buyers are essentially handing over their deposit for the promise of an apartment they won’t see for one to two years (or more), prices are set at current market rates with incentives often offered to entice buyers. This adds to the capital gain potential, but price rises are never guaranteed.
In exchange for your deposit, the developer should provide a contract that outlines the details of your particular purchase, the completion date for the development and the deadline for when a decision must be made as to whether the development will go ahead. That decision usually hinges on whether sufficient finance has been secured. If the developer pulls the pin or passes the decision deadline, you should be entitled to a refund of your deposit, but this depends on the conditions of the sale contract, so it pays to read this document carefully and seek financial and legal advice. Full payment for the property is not required until settlement, which is usually one to three months post completion.
Our tips for off the plan
- Investments like this are big decisions, so having the right professionals on your side before you commit is money well spent. Ensure you get professional legal advice on any contract before you sign it and that you speak with your financial advisor or tax professional to make sure you’ve got the right advice from day one.
- Make sure your deposit will be refunded if the project doesn’t go ahead by a certain date.
- Make sure the contract contains as much detail as possible about the finished product.
- Be clear on what finishes and fixtures you can customise.
- Find out if you can on-sell during construction in case your circumstances change.
- Ask if you can inspect the site during construction.
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Frequently asked questions
How much can I borrow?
We’re all unique when it comes to our finances and borrowing needs. Get an estimate on how much you may be able to borrow (subject to satisfying legal and lender requirements) with our borrowing capacity calculator. Or contact us today, we can help with calculations based on your circumstances.
How long does a new development take to build?
One of the biggest advantages of buying off the plan is time. Unlike traditional property purchases with relatively short windows to round up the total finance, you will have at least 12 months, if not longer, to settle. Savvy buyers will take advantage of this extra time to save their pennies and reduce their borrowings. Remember however that if your financial position changes during the period that the property is under construction you may not be eligible for finance to complete the purchase.
Can I design the interior of my property?
If you dream of a new home but have nightmares at the thought of building one, an off-the-plan purchase may be the perfect compromise. Although you will not get to design everything as you would with a custom-built home, most off-the-plan developments allow some customisation of finishes and fixtures. Make sure your contract outlines what you can tailor and that you are clear on any additional costs.
Are there any incentives to buying off the plan?
Off-the-plan apartments are often pitched heavily at investors due to the tax benefits that come with depreciation on new properties and rental guarantees. Tax savings will depend on your individual circumstances, but generally the newer the property, the higher the depreciation allowance for the building and fixtures.
Investors may also be offered attractive rental guarantees for a limited period. Make sure you do your homework on rental returns on similar properties in the area before accepting the developer’s terms. Be wary of over-inflated rental guarantees. Builders will sometimes promise a high-rent yield to lure investors, build the cost into the property price and then subsidise any gap themselves for a short period. When the rental guarantee expires, you may find the actual market rent falls well short of what you originally pocketed. If investing, make sure you have the option to manage the property with your chosen property manager from the time you take possession
Will my property go up in value by the time it is built?
Many buyers get swept up on a wave of rising property prices when they hand over their deposit in exchange for a floor plan. Historically, property is a consistent long-term performer, but property prices can plateau and even wane at the mercy of economic factors.
Buyers also need to be wary of over-supply, which may devalue their property.
Make sure you consider the bigger picture if buying off the plan. Research how many other developments are planned in the area and whether any increase in apartment numbers is justified by new or improved infrastructure, such as transport corridors, business precincts, universities or hospitals.
Should I research the developer
We recommend purchasing from a reputable builder and take the time to research their previous projects. Do they use quality contractors? Do they deliver projects on time? Make a point of visiting some of their projects so you can assess the finished product first-hand.
What fees/costs should I budget for?
There are a number of fees and costs involved when buying a property. To help avoid any surprises, the list below sets out many of the usual costs:
- Stamp duty — This is the big one. All other costs are relatively small by comparison. Stamp duty rates vary between state and territory governments and also depend on the value of the property you buy. You may also have to pay stamp duty on the mortgage itself.
- Legal/conveyancing fees — Generally around $1,250 – $2000, these fees cover all the legal requirements around your property purchase, including title searches.
- Lender costs — Most lenders charge establishment fees to help cover the costs of their own valuation as well as administration fees. We will let you know what your lender charges but allow about $200 to $995.
- Moving costs — Don’t forget to factor in the cost of a removalist if you plan on using one.
- Mortgage Insurance costs — If you borrow more than 80% of the purchase price of the property, you’ll also need to pay Lender Mortgage Insurance. You may also consider whether to take out Mortgage Protection Insurance..
- Ongoing costs — You will need to include council and water rates, strata fees and regular loan repayments. It is important to also consider building insurance and contents insurance. Your lender will probably require a minimum sum insured for the building to cover the loan.
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