Include the 10% Deposit and Stamp Duty
Any off the plan purchase needs careful planning so that finances are in order and this includes the initial deposit and stamp duty.
While stamp duty requirements and rules vary between states and territories almost all contracts require a 10% deposit at the time of purchase.
With OTP the 10% deposit will often need to be paid during a pre-release period or with very little time at the release of a project and there can often be strong demand. It’s essential to have the full 10% before entering into a contract and most contracts will not have any cooling of period.
The 10% deposit is normally a cash deposit or in some cases a deposit bond or bank guarantee, but this is an immediate payment needed to secure a contract, and most contracts will not be conditional, it’s a done deal.
In NSW stamp duty can range from 4% to 5% and has to be paid either before settlement or if the project has a long construction lead-time, the duty has to be paid 15 months after contracts have been exchanged, and this is not a flexible date or term of the contract, it’s the law.
The combination of the deposit and duty can be a considerable sum and depending on the individual buyer’s circumstances it may be possible to borrow the full amount of these two costs using the equity in an existing property.
However, this finance will need to be in place well before entering into the new contract. For first time buyers the requirements can be different. There are stamp duty concessions available to first time buyers and there are even cash incentives if the buyer meets certain requirements.
These rebates and incentives will vary between different states and territories. The important message is that in planning an OTP purchase it’s important to take all costs into consideration and that’s where a mortgage broker is a really big help, with no cost to the borrower.
How Are Lenders Looking at the Market?
As a general mortgage broker a firm like Yellow Brick Road is able to see how a wide range of lenders are acting, and it’s true to say that recently there’s been some big changes. The home loan market today looks very different from what it did a year or two ago, and the changes are a welcome sign of maturity in the market it’s good to understand how recent changes are impacting access to finance.
Most of the changes are gradual and do not disadvantage buyers with a solid financial position, and interest rates remain very competitive and attractive.
“What we have seen is that lenders have tightened up lending standards in a number of ways over the past 12 months and the trend looks set to be with us for a while.
“Generally, it is much harder to borrow money today than it was one or two years ago, so it’s essential to be seen as a qualified buyer, it’s important to make that point. The various lenders scrutinise all applications, however anyone with a solid financial position should not be impacted.” Said Andrew Read.
Among the changes there’s now an emphasis on establishing a borrowers true living costs and financial capacity, to make sure that the loan is affordable and in reality that’s a sensible policy. Buyers can move with a greater feeling of security and have a long-term financial plan.
Some lenders have also restricted and even banned certain postcodes for new loans as they have expressed concerns about potential oversupply risks. A policy that’s in my view less clear-cut. The policy looks unfair, as many buyers would meet the financial capacity and not be impacted by any possible oversupply. It’s also reasonable to acknowledge that some areas are going to attract more development because they are popular locations, so this is a policy shift among some lenders that some argue just reinforces negative perceptions of an area, and that loans should be managed on an individual basis.
A blanket ban looks a sledge-hammer approach and it’s a point that has divided opinion.
What’s The Role and Cost of Mortgage Insurance
Moving from these general comments lets look at some more specifics, starting with mortgage insurance as this is an area where there can be some confusion.
Mortgage insurance is a one-off insurance premium paid to the lender at settlement, but it can be avoided and is only paid if the loan is more than 80% of the security value. So it would apply if a purchase was made on just a 10% deposit.
The policy cost is tiered depending on the overall loan to value ratio (LVR) and the loan amount. Some lenders will allow the premium to be added to the value of the loan, and the policy insures the lender and not the person taking out the loan, that’s an important point to understand. This insurance does not protect the borrower in any way.
Off The Plan Key Risks & Benefits?
Many issues that relate to mortgage finance are common to every borrower, however there are some specific finance products that are worth looking at for OTP buyers.
There are several lenders that offer an 18-month pre-approval for OTP purchasers subject to valuation and confirmation of the borrower’s financial position, its a very good loan, however the loan does remain conditional and assumes that the individual circumstances of a buyer have not changed.
However, under normal circumstances, this is a really good option and can assist buyers who might according to Andrew Read be concerned about the possibility of a lenders policy changing (and we have seen some examples of this happening) and it works really well when the settlement is expected in less than 18-months.
However according to Andrew the most popular lenders for OTP buyers are driven by the lenders valuation policy.
How this works; if the contract was signed at least 12 months prior to settlement, these lenders will allow buyers to use the high valuation (assuming the market has increased) as the basis for their loan, and in doing so take advantage of the possible increase in value.
This often then allows buyers to borrow 90% of the contract price without paying any mortgage insurance, because the valuation has increased to keep the loan value at 80%, and this can save quite a bit of money.
Summing Up: OTP and an Already Existing Property
As discussed time is the biggest factor with an OTP purchase, it’s both a positive and a negative point of difference. Key to OTP buying is however planning, and as Andrew Read suggests, there’s much more to consider than buying a one-off existing property.
There can also be some risk, and that’s why the help of a broker is really essential. However, an OTP purchase can be a very exciting process, one that’s full of opportunity and promise.
In the mix of today’s new apartment market, the role for off-the-plan marketing and has changed as we’ve seen record activity, and some of the key aspects of an OTP purchase are worth summarising.
It’s important to gain an understanding of the new Strata rules in NSW, and talk to a broker about finance with ample lead time on your side so that you can consider specific finance products that are on offer and best suit your personal needs.
For owner occupiers OTP often appeals because it gives ample time to plan a move: if trading up, there’s time to organize the sale of an existing property and manage settlement terms. If your trading down OTP allows you to lock in a price and possibly plan to release capital from the sale of an existing property.
For investors it’s often a good idea to vary the type and location of the OPT projects you might consider. Think outside your local area, as it’s good to diversify and there are a wide range of projects, locations and cities to select from.
Investors in new OTP projects should also be aware of the importance of depreciation and how negative gearing works. Also it’s a good idea to be aware of rental potential and there’s lots of research available, so do the homework.
For both groups it’s also important to keep an eye on interest rates, while they are low now, but what about in 2 or 3 years? And when dealing with potential capital gains, it’s again important to make sure you fully understand the rules that apply.
One final point with OTP buying is to always consider the brand and reputation of the developer. The developer’s reputation is very important when you consider that some transactions can take many years to complete.
The security of the project and the end quality when the project is ready has a big impact. Overall OTP is a great way to buy an apartment and there’s lots of help and advice out there to help with planning and finance.