How to: Organise finance for a new build

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Off the plan properties appear attractive to some buyers as only a 10% deposit is required up front, leaving a timeframe of 12 to 18 months to get the necessary finance in place.

Off the plan purchasers are entitled to borrow the same amount as other forms of lending – up to 95% of the purchase price and capitalised lenders mortgage insurance (LMI) – but will need to commit to the purchase without having an unconditional approval from the bank.

Buyers cannot apply for a mortgage if settlement is over 18 months away but most lenders issue a pre-approval, and once settlement comes, it can be reassessed.

Multifocus mortgage broker Philippe Branch says generally lenders require a valuer to go on site and visit the premises, which is only possible about four to six weeks before settlement.

“An application can be lodged up to six months in advance with some lenders but the approval is subject to valuation,” Branch says.

“Some rare lenders will offer full approval with an off the plan valuation, without going on site up to 17 months before settlement. However, they will do a physical valuation before settlement to confirm the first valuation.”

Branch advises that purchasers stick to borrowing 90% of the purchase price plus capitalised LMI as a maximum, as LMI can become expensive at 95%.

“LMI can be over 4% of the value of the loan and mortgage insurers become really nervous of mortgages over 90%, applications need to be strong,” says Branch.

Branch says there are hidden costs to be aware of in buying an off the plan property, including not only a lawyer, but also blinds and curtains.

“Lawyers costs are typically more expensive as off the plan contracts are usually not standard contracts,” he says.

“So whereas a typical conveyancing would be $1500 to $2000, an off the plan would probably be $2000 to $3000.

“Also, make sure that blinds and curtains are included in the contract otherwise it is an extra cost at settlement.”

The repayment schedule of an off the plan purchase does not differ from other forms of lending and can be paid as principal and interest over 30 years or interest only over 30 years, with a five to 15 years interest-only period.

If the developer happens to go bust during development, the purchaser does not lose their 10% deposit.

“Most off the plan deposits will go into a lawyer’s trust account and is not available to the developer,” says Branch.

“If the developer goes bust, then the deposit and accrued interest will be returned to the buyer.”

Branch says buyers sometimes give a 10% deposit or more to the developer directly, who in return promises huge interest, typically 15% per annum.

“Schemes like this gave off the plan a bad name in the past. If the developer goes bust, the investor has lost the deposit,” says Branch.

First home buyers are entitled to state grants when buying or building a new home and buyers in New South Wales are entitled to a New Home Grant, which equates to $15,000 for off-the-plan homes, dropping to $10,000 in 2016.

The list of grants available in each state can be found on government websites.

Buying off the plan comes with pros and cons like any property purchase, but it’s important to keep in mind that a pre-approval valuation may be less or more than the final valuation, ultimately altering the percentage of the amount borrowed.

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