April 2023 - 3 minute read
What is buying off the plan?
Buying an off-the-plan property means you’re purchasing real estate based on a set of plans, drawings and maybe a show home – the home you’ll own hasn’t yet been built, or it’s still under construction. When you sign an off-the-plan contract, your purchase is defined by the details in that contract.
Each contract is different, but there are some key requirements for off-the-plan purchases:
- You’ll most likely pay a deposit of up to 20% of the purchase price to secure the property.
- There is typically a long time between when you buy, and your move-in date, depending on the stage of construction when it was purchased.
- You pay the remainder of the funds upon completion.
Buying off-the-plan is different to building a new home because you won’t be involved in designing the exterior or the floor plan. You’ll also have the option to choose from a set of prescribed fixtures and fittings. Your contract will typically come with a detailed outline of these, and sometimes you’ll get an option to upgrade materials and fittings at an additional cost or to have input into the overall look of the interior.
It’s important to understand exactly what inclusions and warranties you’re getting in the contract of sale, and that there’s a dispute resolution process in place. That means if your home is completed, but the fixtures, fittings or property details are not what you were promised, there’s a process to resolve the issue.
What are the risks and benefits of buying off-the-plan?
Buying off-the-plan can be a great way to get into a new property while continuing to save for your home, but there are also risks to consider. Here are some pros and cons:
Benefits of buying off-the-plan
- If you are building new yourself, you may encounter issues during the build process. In an off-the-plan purchase, the developer has to deliver the property as per the agreed plan and design.
- As your property price is locked in at the date of contract exchange, if property prices rise while your home is being built, you could make a gain on your purchase before it’s completed.
- You may be able to tailor the property to your taste by selecting fixtures and fittings for the interior from a list of options. These can however be limited to a set list sourced by the builder. Sourcing fittings from different providers yourself could incur additional costs.
- Lower maintenance costs – once you’re in, your home is unlikely to need upgrades or repairs anytime soon, compared to buying a ‘second-hand’ property.
- There’s potential for stamp duty savings (see more below).
Considerations to make if you buy off-the-plan
- In some cases, the development doesn’t go ahead. Typically, this means your deposit will be refunded, but in the meantime, you may have missed out on other property opportunities.
- If the developer goes broke before completing the development, there may be financial impacts to buyers.
- Just as there’s potential for capital gain, there’s also the potential for the market value to drop before settlement.
- If there are construction delays, you may need to make alternative arrangements until you can move into your new home.
How will you fund your off-the-plan purchase?
Before you look at signing up for a property off-the-plan, you’ll want to know how you’ll finance the purchase.
Funding an off-the-plan home is slightly different to purchasing an established property. You usually pay a cash deposit upfront to the real estate agent or vendor’s solicitor, who'll hold it in a trust or controlled money account for the duration of the build. It cannot be released to the vendor during this time.
The deposit is agreed upon by the developer and purchaser. It can be up to 20% of the estimation of the total purchase price of the property. The remainder is usually paid at the completion of the build, depending on what is agreed in the contract.
Considering the long time between the initial deposit and delivery date, it is recommended to regularly check your borrowing capacity with your lender as lending conditions or your personal situation may change over time.
If you’re looking at purchasing your first home, you may also be eligible for a First Home Owners’ Grant. The grant differs between states, so contact your local authority to find out if you’re eligible.
How LVRs affect your lending ability to buy off-the-plan
It can be years before an off-the-plan build is completed. The value of your off-the-plan property may change from when you put down the deposit until construction is completed. This may have an impact on your LVR position if you need a home loan to settle. If your property value goes up it could potentially reduce the LVR, and vice versa.
Most lenders will require you to pay Lenders Mortgage Insurance (LMI) if your LVR is above 80%. This insurance protects your lender in case you default on your payments.
How an off-the-plan contract works
One difference between an off-the-plan contract and a property purchase agreement for an existing home is that it contains contingencies for dealing with issues that may arise during construction. The contract also has details around the final product’s look and inclusions, so you know what you’re paying for at the outset.
Before you commit to signing the contract, seek independent legal advice from a property lawyer or conveyancer to ensure the contract provides adequate detail and protects your interests.
Here are some of the key features of off-the-plan contracts:
A sunset clause is essentially a safety net for home buyers. It sets a time limit, and if the build is not completed by that date, the buyer can choose to void the contract and get their deposit back.
The disclosure statement records the purchasers’ and the developers’ names and addresses. It identifies the block of land or unit and promises to provide a future certificate of title. Both parties must sign this statement.
The architectural plan will identify the proposed building and its layout and may include architectural renders.
Proposed schedule of finishes
A schedule of finishes outlines what finishes will be included, which may include wall coverings, floor coverings, lighting, fixtures, fittings and appliances.
Stamp duty and off-the-plan concession
Stamp duty is also known as ‘land transfer duty’ and is a government tax on property transactions. When buying off-the-plan, you may be eligible for reduced stamp duty.
Our stamp duty calculator can help you work out how much you may need to pay.
To sum up
- There are many factors prospective buyers should consider before choosing to buy off-the-plan, build a new property or buy an existing property.
- Before signing a contract, seek legal advice from a conveyancer or lawyer to help you check and understand the details of your contract.
- If construction is delayed, you may need to arrange temporary accommodation until your new home is finished.
- Keep in touch with your lender as lending conditions or your personal situation may change over time.
Let us help you weigh up what kind of property purchase and loan works best for you. Get in touch – we’d love to hear from you.