Pros and cons of buying off the plan
Like any investment, buying off the plan comes with risks and benefits – so make sure you’ve done your research. Here are some of the risks and benefits you may need to consider:
Benefits and risks of buying off the plan
If you get in early enough – particularly, before construction begins – the developer may potentially offer a discount on the purchase price.
There’s potential for the property to increase in value during the course of construction.
Rather than having to pay the deposit right away, the developer may agree to let you secure the purchase using a deposit guarantee from your bank. This could allow you keep earning interest on your funds while your home is being built.
Input into design
You may get more control over the interior style of the property. Check with the developer to find out what’s possible.
Developer may go bankrupt
If the developer goes bust before completing, you may not get your deposit back. This will depend on the terms of your contract.
Lower property value
Your lender will only value the property at completion and sometimes the final value may be less than expected. This in turn may affect your LVR (see below).
Doesn’t meet your expectations
When you buy off the plan, you don’t get a chance to ‘walk through’ the property before you buy it – so it might turn out different to what you expected.
Always check with the developer to see if they offer the above benefits. Also make sure you read their terms and conditions very carefully before signing a contract. It may be a good idea to get some advice from a lawyer or conveyancer.
Tip: Don’t forget to factor in the First Home Owner Grant (FHOG) or stamp duty concessions. You don’t necessarily need to be buying ‘off-the-plan’ to be eligible, but they’re worth bearing in mind when weighing up your options. Rules vary depending on the state or territory – check your eligibility carefully.
Your deposit when buying off the plan
When you buy off the plan, you may need to pay a deposit of between 5% and 20% when signing the contract of sale. This may be held in a trust account until after completion.
All of this could take well over 12 months, which may be good news because it’ll give you more time to save a bigger deposit. But there are other things to factor in too.
Let’s unpack things a bit more...
Potential risks and gains
Let’s say your property’s value goes up while it’s being built. This would be good news because your Loan to Value Ratio (LVR) may go down.
Your LVR is important because it will affect whether you need to pay the added cost of Lenders Mortgage Insurance. As a rule of thumb, the lower your LVR the better.
Let’s use an example to help explain how things work. To keep things simple, we've left out some of the fees and costs you may have to pay when buying a house.
- Let's say you agree to purchase a property for $500,000.
- You have a deposit of $100,000, meaning you need to borrow $400,000.
- This means your current LVR is 80%.
Two years later, when it's time to pay up:
- The property’s value has gone up in value to $550,000.
- Even if you still need to borrow $400,000, your LVR will go from 80% to around 73%.
- This is because $400,000 is only 73% of the current property value.
On the flip side, if the property value falls from $500,000 to $400,000, your LVR will go up – particularly if you haven’t saved significantly more for your deposit. This may affect the likelihood of you getting a loan, or it could mean having to pay for Lenders Mortgage Insurance.
LVR is important so make sure you understand how it works. Read more about LVR.
Saving a deposit when buying off the plan
The big question is: How do you come up with enough money for a 10% deposit (plus upfront costs and fees)? For an off-the-plan property worth $750,000, a 10% deposit is $75,000. We’re not talking loose change here.
In most cases, lenders won’t let you borrow the 10% deposit as part of a home loan. You’ll need to find the money yourself.
Here are some of the ways first home buyers may come up with the money:
- Save more money. Read our tips on saving for a deposit
- Borrowing from family. You could ask a family member for a loan.
- Cash gift. But even if you recieve a cash gift (or borrow from your family), you may still have to prove evidence of your own savings when you apply for your home loan.
Every person’s situation is unique, so be realistic about what you can afford.
To sum up
- When you buy off the plan, you may need to pay your deposit well in advance of the property being finished.
- There are risks and potential benefits to buying off the plan. Weigh them up carefully and seek further advice.