You’ve more than likely heard dozens of arguments both for and against buying property “off the plan.”
I’m not going to get into that here; instead I would like to highlight some of the finance risks of buying off the plan.
When you commit to buying a piece of real estate that doesn’t actually exist yet, a number of specific finance risks can arise and to the uninitiated or unprepared, these have the potential to seriously derail their investment and crunch through any prospective profits.
1. The risk of your debt situation changing.
Usually with an off the plan property purchase, settlement is a long time away; 24 to 36 months is the norm.
During the period of signing a contract to purchase and actually settling the property, you may acquire more personal debts such as car loans, credit cards and store cards, all of which can impact your borrowing power and increase your risk profile from the viewpoint of your lender.
2. The risk of losing your job.
If you have no evidence of a consistent income and you happen to be job searching when it comes time to settle your property purchase, you’re likely to have real difficulty getting a loan.
Similarly, a reduction in your salary could lower your borrowing capacity and impact your ability to settle the property loan.
And don’t count on a finance pre approval for an off the plan purchase – they’re usually only valid for 90 days.
3. The risk of the market falling.
If the eventual market value of the property is less than the amount you agreed to pay for it, this will result in a higher Loan to Valuation (LVR) – or a higher deposit required.
You must be prepared to kick in the cash shortfall if this eventuates, or you risk losing everything.
I have seen investors who’ve lost significant deposits over this issue; some have even been sued.
4. The risk of tarnishing your credit profile.
At the time of signing your contract, you may have a perfect credit score.
But what happens if in the three years it takes for your new property to be completed and finance to settle, your credit profile takes a hit?
This could impact your chances of being approved for a standard loan, forcing you to shop around for a more expensive mortgage to get the deal settled.
5. The risk of changing careers.
If you change jobs and move into a new position with the same or higher pay packet, you may be wondering how there could be an issue from a finance perspective?
The problem from a financier’s perspective is that if you change employers and change industries, you no longer have a proven track record in that field and you therefore constitute a higher risk.
In today’s tenuous lending environment this could cause the bank to refuse to offer you finance.
6. The risk of changing lending policies.
Ask those who signed on the dotted line for an off the plan property purchase 12-24 months ago, and I’m sure none of them expected to be told they would need a 20 per cent deposit in order to settle their investment purchase.
Lending policies can and will change at the will of the banks and as an investor, you can be burnt financially as a result.
7. The risk of interest rates rising.
Again, APRA-prompted interest rate hikes for investors hit a lot of investors and would-be investors in the hip pocket when banks enforced the rises recently.
This can reduce your overall borrowing capacity and increase your risk profile from a lender’s perspective.
There has always been a certain level of risk associated with investing in off the plan property (or in fact, investing in any property.)
The finance risks outline in this article are by no means definitive, but they represent some of the real impacts that an off the plan purchase can entail.
I would urge investors to take great care when considering an Off The Plan purchase, to ensure you are well prepared for any unforeseen changes in your circumstances.
With all the risks involved in buying off the plan you should receive a hefty discount, yet most off the plan properties come at a premium to the market price.