When buying off the plan always plan ahead to get the best finance options
Buying an apartment off the plan (OTP) as a home or for an investment remains a very popular part of the real estate market. It’s been one of the big drivers of activity over recent years. However, when it comes to finance, what are the key points to keep in mind, and what are some of the factors to keep in mind when securing finance for an OTP purchase.
According to Andrew Read, Wealth Manager and Principal from Yellow Brick Road Finance, financing a OTP purchase is much like any other property purchase, however, there are some specific aspects to think about, and I’ll explore some of these, but according to Andrew the one key element is ‘time’, so that’s our starting point.
In NSW the purchase of an existing home will normally involve a contract period of 42 days, from exchange to the settlement. During that time, it’s always necessary to have all finances in place, as once the contract is unconditional, the clock starts ticking down to settlement right after the contract is signed.
The circumstances and time when making an OTP purchase will be very different.
The contract period could run for anywhere between 12-36 months, and depending upon individual contract terms that timeline can change, however the finance will not be required until the project is complete and ready to move into. (In my post 11 November 2016, I looked at the mechanics of settlement).
The longer lead time often appeals to buyers, as it gives them time to possibly sell an existing property and plan their move.
OTP contracts will also contain a sun-set provision and the laws (NSW) were recently changed. Given that some contracts may not be completed for some years. Contracts will usually contain a number of conditions, including the agreed time-frame for the developer to complete the project, the level and standard of finishes and importantly how the contract can be varied or terminated, and by who.
The recent legislation was amended to provide additional protection for OTP purchasers. The law has been strengthened to help stop developers from unreasonably using sunset clauses to possibly bring contracts to an end, this was seen as a welcome and necessary change.
In summary under the new laws, now a developer is required to give notice to each purchaser, before ending the contract. This notice must state why the developer proposes to end the agreement and give reasons for delay with the project.
For the contract to be terminated, the purchaser would need to agree. If the purchaser does not agree, and the apartment has not been completed before the sunset date, then the developer needs to obtain an order from the Supreme Court permitting the contract to be rescinded.
However, as almost all contracts do go to completion, when considering finance, according to Andrew, regardless of the length of the contract it’s always recommended that OTP buyers get a full understanding of their financial position and borrowing capacity well before the purchase is due to settle.
“It’s always a really good idea to be aware of your borrowing capacity and the deposit requirements and always aim to get pre-approval for the full loan amount.
“If selling an existing property, there will be a range of costs, and the market is always changing. And buyers should not forget stamp duty, which in NSW for the majority of buyers has to be paid before settlement or 15 months after contracts have been exchanged.”
Stamp duty can be a major cost, and in combination with the required deposit, usually 10%, that cash or a loan has to be available, regardless of any equity in an existing home. If the OTP apartment has a price, for example of $1,500,000 the combination of these costs would be $150,000 deposit and then stamp duty of $67,990, plus some legal and transfer fees a total of $217,990. This is why it’s always a good plan to get a full idea of your total financial position and borrowing capacity.
Once you’ve done some homework, when the project gets near completion always allow ample time to arrange finance, allow at least 8-10 weeks. As Andrew points out, it’s just added stress if left to the last minute and if settlement is delayed by the purchaser it can involve extra and unwelcome costs.
“It’s also true that the lending market is always changing, rates and terms move all of the time and it’s important to give yourself and your finance broker enough time to arrange finance prior to settlement.”
Individual circumstances will always vary, a first time buyer will have a lot of details to cover, along with a range of personal and financial details, and if selling an existing property, organizing finance can be even more complex. So my advice is to always plan ahead and plan in detail.