Is buying off the plan a good idea?

Buying off the plan can be a smart and affordable choice compared to buying an existing property. But it also comes with potential risks. Let’s look at the reasons for and against.

How much can I borrow?

Use UNO's calculator to estimate your borrowing capacity.

Benefits:

• You only need to pay the developer a deposit to secure the property. This can give you more time to save before settlement.
• You can lock in a price, so the property may experience capital growth during the time it is being built.
• Investors typically enjoy larger tax depreciation benefits on new properties, which can help improve after-tax cash flow.
• First home buyers can save thousands of dollars by avoiding stamp duty. Each state has its own concessions. Check out UNO’s stamp duty calculator page for more information and to calculate the savings in your state.
• If you get in on the development right at the start, you will usually get the best price, as the developer needs early sales to meet their financial requirements.
• Newly built properties in Australia have a seven-year builders’ guarantee. Any structural or interior building faults found during this timeframe must be repaired by the builder.

Risks:

• The property market may drop between the time you exchange contracts and the building is completed. If this happens, it can be trickier to secure finance.
• The quality of the finish may not be to the standard you expected.
• Interest rates may rise before you settle the property, meaning you could miss out on locking in a competitive rate.
• The developer might go bankrupt before the project is completed. In most cases, you will get your deposit back, but tying up your money for a period of time could see you miss other opportunities.
• You may be waiting months or even years before your property is completed.
• Banks and other lenders may offer you conditional approval, but they won’t loan you the money until the property is built. If your financial situation or the lending criteria changes in this time, you can be at risk.
• With a saturated market, it can be difficult to differentiate your apartment from others when it comes time to sell

What to be aware of before sealing the deal

There will always be pros and cons with any investment, so how can you ensure you minimise the risks?

Research, research, research

Understand the location you are purchasing the property in and what the current market conditions are. Then make sure a reputable developer is working on the project. Review their past work, do license checks, find out their financial situation and try and seek feedback from others.

Review the contract with a legal professional

Taking the time to go through the contract with a conveyancer or solicitor is extremely important.

You will want to look for things like:

• When the completion date is set for and what penalties are involved if you withdraw the contract
• Whether you can make changes to finishes and fixtures
• What happens if the developer runs into financial problem – will you get your deposit back?
• What happens about any faults that are found after you have moved in?

Have your finances in order

You will want to make sure that the contract is subject to you obtaining finance within a certain time frame from when you sign the contract.

While securing finance for an off-the-plan property doesn’t differ too much to getting a loan for an existing property, you will have to apply for a loan within 3 months of the home being complete. Sometimes you have to put a deposit down a year in advance too, which can be a struggle for some buyers.

A looming oversupply of off-the-plan apartments

A recent BIS Oxford Economic study forecast a marked slowdown in unit construction through 2019, as oversupply in Melbourne, Brisbane and Sydney starts to cool the market.

Docklands, Melbourne apartments built in the past five years have either dropped in value or seen no price growth. NAB recently predicted that unit prices in the capital city will fall by 2.6% by the end of 2017 and then drop a further 2.4% in 2018.

A buyer that has already paid a deposit and is awaiting completion in the next year or so could find themselves needing to make up the shortfall themselves.

Sydney’s median house and apartment prices are expected to fall 4% by 2020, with Brisbane units predicted to fall by 7% according to the same BIS Oxford Economics study.

Does this mean that an off-the-plan purchase is not wise in today’s market?

Not necessarily. An off-the-plan purchase can still make a great investment if you are purchasing in an area that has high demand and low supply. Look for a reputable developer with a proven track record.

Opportunities to purchase will appear where completion of the property is not too far away, leaving you less at the mercy of the market if you are familiar with the conditions in the area you are purchasing in.

What to do next:

• If you’re looking to buy property, email us at customer.care@uno.com.au about your home loan options; and
• Test our calculators to work out how much you can borrow
• Book in a quick call with our customer care team.