Obtaining a home loan for an off-the-plan property operates a bit differently to the purchase of a traditional property. Although you are buying a property that has not been constructed yet, you are still required to put down a deposit when you make the purchase, as you would when buying a property that has already been built. This deposit will usually be between 5% and 20% of the total purchase price of the property. However, you will not be assessed for a home loan until construction of the property has been completed, which might be quite some time after you paid the deposit.
Constants in home loans
There are some things which are constant when it comes to obtaining a home loan, whether it be for the purchase of an already constructed property, or for one being bought off-the-plan. These will always need to be considered when seeking approval for finance.
Loan to Value Ratio (LVR)
Loan to Value Ratio (LVR) is important for any home loan, because it can affect your borrowing power. Essentially, LVR shows what proportion of the value of the property you will need to borrow.
LVR is calculated by dividing the amount of the loan you want to get by the value of the property you want to buy.
The lower the LVR, the more willing lenders will be to lend you money, as a lower LVR is seen as carrying less risk for them. Having a lower LVR might also help you avoid additional costs such as Lenders Mortgage Insurance.
Lenders Mortgage Insurance (LMI)
Generally, borrowers with an LVR over 80% will be required to pay Lenders Mortgage Insurance (LMI). Although you will be paying the premium for this insurance policy, it is not for your benefit. LMI is intended to protect lenders in the event that a borrower defaults on their loan.
For example, if a borrower is unable to repay their loan, the lender can sell the property to recover the amount still owed to them. If, after the sale of the property, the borrower still owes the lender money, the lender can claim this amount from the LMI provider.
Considerations for off-the-plan loans
Saving for a bigger deposit
An advantage of off-the-plan purchases is that you have more time to save for a deposit. When you purchase an off-the-plan property, you will need to put down an initial deposit, as you would for any other property. However, unlike purchases of completed property, you then have an opportunity to save more to put towards the deposit while the property is being built.
Construction of your off-the-plan property may be quite a long process, giving you plenty of time to save for a bigger deposit. The more you are able to put towards the deposit, the less you will have to borrow. As such, you are more likely to be approved for finance.
Loans for off-the-plan property are assessed when construction of the property is completed, as opposed to at the time of purchase. Lenders generally will not offer approval for a loan for more than 6 months, so it is no use obtaining this approval when you purchase the off-the-plan property. However, it is a good idea to get an informal assessment at the time you are purchasing the property, to get a rough idea of how much a bank might be willing to lend to you. This pre-qualification for a certain amount may also inform the type of property you choose to purchase.
What can change between purchase and completion?
A number of things can change in the period between your purchase of an off-the-plan property and the completion of its construction. These changes may affect your bank loan or the amount you are able to borrow.
One significant change that might occur is that in the time between the purchase and completion of the property, its value may have increased or decreased. This will not affect the overall amount you will be required to pay, as the purchase price was locked in at the time of purchase. However, a change in the value of the property may have implications for your bank loan.
For instance, a change in value will affect the LVR. Some lenders will calculate LVR using the price at which the property was sold, while others will use the property’s revised value once it has been built. This is something a borrower will need to check with their lender. The LVR may increase or decrease, which may result in additional costs as discussed above.
There are also a number of changes to lending criteria that could occur. This might mean that you cannot borrow as much as you initial assessment may have indicated. For example, interest rates may have risen, which would affect your ability to repay the loan. Lenders may also tighten their lending standards, or impose additional requirements for off-the-plan lending or deposit requirements.
Bank loans for off-the-plan properties work differently to other bank loans, and there are a number of factors that purchasers should consider before seeking a loan for the purchase of an off-the-plan property.