When making the decision to buy a home, you will find yourself with a number of options. You may choose to buy an old home then renovate, or you might find the perfect piece of land and build a home from scratch, otherwise you can choose to buy off the plan construction and wait a year or two for it to be developed. Off the plan construction is when you buy a unit or townhouse directly from a builder or developer, and they keep control of construction usually leaving the buyer with little choice in the construction process.
Most often, it occurs in large developments, housing with multiple story units and land projects. The buyer initially signs a contract prior to construction, paying the initial deposit.
The developer behind the construction often waits for strong pre-sales prior to building, to reduce financial risk, and from there construction commences. In this situation, the developer has been granted a construction loan, therefore nearing towards the end of the construction process you will be able to settle on the finished product. The preliminary process of pre-sales and initial contracts may start up to two years prior to when you are finally offered eventual possession, therefore buying off the plan can be a long process.
Over the construction process time, a contract is always signed which binds you to settle, however unconditional finance approval is not obtainable at this stage. It is recommended that you receive advice towards obtaining finance on your current circumstances. The following indicative approvals will remain in reliance to valuation of the finalised construction and confirmation of your financial circumstances.
Throughout everything you do within this process, it is important to be aware of the element of risk attached to your decisions, it is advised to stay in constant contact with your mortgage broker to enable you to stay aware and up to date towards what is going on. When working to gain unconditional approval, it is important to review your financial commitments, as outlined below:
- Buying an investment property
- Buying a car
- Maternity leave
- Changing careers
- Moving house
Through staying on top of and in control of your financial commitments, this will ensure that during construction time you can afford and stay in control of your cash flow and expenditures, minimising your financial risk. However in detail, what exactly are risks and benefits of buying off plan?
Benefits to buying off the plan?
- A fixed price – You will pay the retail price for the property market now, even though it will not be completed for some time.
- Property value inflation – If the market grows, your property will increase in value over this time, and when you settle two years later you will have income growth.
- Buying now secures the property, you are sure you will receive it once it is built.
- 7 year builders guarantee – Structural or interior building faults are required to be repaired by the builder.
Risks to buying off the plan?
- Fluctuation and fall in property market – You may run the risk of overpaying if there is a fall in the market over this time.
- Expectations not met – As you only see the final product, what you had envisioned prior to building the property may be quite different to what you receive.
- Developer bankruptcy – You need to determine what your options are if developer goes into liquidation before the project is complete, what guarantees do you have?
- Rising interest rates – Interest rates could increase before you settle on the property which is problematic if you wanted to fix the term of the loan at the current interest rate.
- Over this two year period, your financial or lifestyle circumstances may change and you may not qualify for a loan.
Key points to remember
To reduce your risks when buying off the plan we recommend that you work to stabilise yourself financially until your property is settled. Also ensure you have a strong cash buffer so that any unexpected payments can be covered. Consider all of the benefits and risks prior to purchasing off the plan, as with the chance of property inflation, unfortunately comes the risk of falling value, as the lender will lend against the value at time of completion.
If you would like to speak directly with Discovery Finance about buying off the plan please contact me directly today. We can help you with your new property purchase, financing and working towards a loan that settles.