Pros and cons of buying off the plan

Pros and cons of buying off the plan

Open the real estate section of any newspaper and you are bound to come across glossy advertisements spruiking a shiny new development being built in a prime location in your capital city, usually close to the CBD and established amenities.

With capital cities across Australia suffering from a housing shortage – which subsequently pushes up property prices – the proliferation of new developments is seen as contributing to meeting the housing needs of our growing urban populations.

One such development in Melbourne, Live Brunswick East by Little Projects, is selling off-the plan one-bedroom and two-bedroom apartments from $340,000 just 6km north of the CBD. In the inner Sydney suburb of Newtown, another new development Industri is selling one-, two- and three-bedroom apartments as well as terraces off the plan.

Buying off the plan means signing a contract to buy a home before it has been built. While there are benefits to buying an apartment off the plan, there are also drawbacks.

What makes it an attractive option

Property lecturer and author Peter Koulizos says the primary attraction of off-the-plan apartments for buyers is their location and accompanying lifestyle. “These apartments are often in desirable locations,” he says. “For owner occupiers, their number one priority is not to make a profit – it’s to enjoy a certain lifestyle and that is the appeal of buying off the plan.”

If you enjoy the thought of living in a brand new home that has had no other inhabitants before you, then buying off the plan may be for you. If you get in early, you have your choice of apartment that will suit you most, rather than choosing from what’s left at completion.

There can also be stamp duty savings, depending on which state you live in. In Victoria, you are eligible for a 40 percent reduction on stamp duty if you buy a newly constructed home for $600,000 or less. In NSW, you do not pay any stamp duty for new homes under $550,000 and receive a discount on homes between $550,000 and $650,000.

What can go wrong

Buying off the plan means you are buying something you can’t see – you are relying on the developer’s display suite to portray an accurate depiction of what your future home or investment property will look like. The result may not always be what you expect. Koulizos says developers can make changes during construction if they are running out of money, choosing cheaper finishes to finish the job on budget.

“Changes can be made without your permission,” he says. “It will be written in the contract in very fine print.”

Furthermore, Koulizos has researched the capital growth of off-the-plan apartments around Australia and has found that many apartments end up selling for less than their original price, especially if sold within four or five years of construction.

“You buy something at today’s prices in 2013 to settle on something in, say, 2016. The theory is that property price will have gone up in three years,” he says.

And generally, that’s true. What can happen with off-the-plan properties, however, is that investors tend to snap up these properties with the intention of on-selling their contract at a profit before the development is completed. “So you have a large number of apartments going up for sale in the one development, which invariably brings down the price of all other apartments,” Koulizos adds.

Another issue with buying off the plan, according to Koulizos, is the potential of an oversupply of new developments, such as what happened in Melbourne’s Docklands, where an oversupply has meant property prices have not increased in value in 10 years. Pyrmont in Sydney is another example of an oversupplied area.

If you are considering buying off the plan, Koulizos recommends the following checklist:

  • Ensuring there is at least one car park on title.
  • Look for views that can’t be built out.
  • High-quality fittings and finishes.
  • Quiet location.
  • Read the contract carefully.

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What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

What is stamp duty?

Stamp duty is the tax that must be paid when purchasing a property in Australia.

It is calculated by the state government based on the selling price of the property. These charges may differ for first homebuyers. You can calculate the stamp duty for your property using our stamp duty calculator.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

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If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

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There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

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Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

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No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

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If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

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