Key Takeaways
- Buying off the plan usually means committing to a property before construction is completed, with settlement occurring later.
- The time between signing and settlement can create finance risk because borrowing capacity, lender policies and property values may change.
- Off the plan properties for investors may provide access to newly built housing, but expected rent, future value and tax outcomes should not be treated as guaranteed.
- Investors may wish to consider contract terms, valuation risk and their ability to obtain finance closer to settlement before committing.
Buying an investment property off the plan creates a different financial timeline from purchasing an established property. An investor may sign a contract and pay a deposit well before completion, while much of the remaining purchase price may become payable at settlement. During that period, property values, interest rates and the investor’s financial position could change.
This gap between contract and settlement makes finance planning particularly important. Investors considering off the plan properties for investors may wish to speak with experienced mortgage brokers in Sydney about how borrowing capacity, lender policy and the property’s eventual valuation could affect finance closer to completion.
This guide examines the potential benefits and risks of buying off the plan, how lenders may approach the transaction and what investors could consider before signing a contract and preparing for settlement.
What Does Buying Off the Plan Mean for an Investor?
Buying off the plan involves agreeing to purchase a property before the finished property is available to inspect. The property may still be under construction, or construction may not yet have started when the contract is signed.
Depending on the contract, the investor will usually pay a deposit, with the remaining purchase price becoming payable at settlement once the relevant completion and settlement requirements are met. The precise arrangements and contractual obligations can vary between developments and jurisdictions.
This differs from some house and land packages for investors, where an investor may purchase land separately and enter into a building contract, with construction finance released progressively.
Investors considering buying off the plan may therefore need to consider both the property and whether their financial position is likely to support the required finance when settlement approaches.
Potential Benefits of Off-the-Plan Investment Properties
Off-the-plan purchases can have characteristics that appeal to some investors, but these should be weighed against the longer timeframe and associated risks.
Access to a newly built property
One potential attraction is access to a newly completed dwelling. Depending on the development and local market, newer finishes, appliances or building features may appeal to some tenants. However, rental demand and achievable rent can vary by location, property type, competing supply and market conditions.
When comparing new build properties for investors, it may be useful to assess the property’s location, design, ongoing costs and local supply rather than relying on its new-build status alone.
Time before settlement
The period between contract exchange and settlement may provide additional time to prepare funds. However, it should not be treated as a guaranteed financial advantage. Changes to income, expenses, debts, interest rates or lender policies could affect borrowing capacity before completion.
Potential tax considerations
New residential property can have tax considerations that differ from some established investments. Depending on applicable legislation and individual circumstances, qualifying new builds may be relevant to new build negative gearing and new build CGT rules. Being marketed as new or off the plan should not, by itself, be taken to establish eligibility for a particular tax outcome.
What Are the Main Risks of Buying Off the Plan?
The extended period between signing and settlement can introduce risks that may be less prominent when purchasing a completed property.
Valuation risk
The contract price may not match the property’s lender-accepted value at settlement. If the valuation is below the contract price, the amount available to borrow could be lower than expected, potentially requiring the investor to contribute additional funds.
An early finance assessment or pre-approval should therefore not be assumed to guarantee the amount available at settlement. Investors considering investment property finance may need their circumstances and the property reassessed closer to completion.
Delays and changes before completion
Construction and settlement may occur later than initially anticipated, and some contract terms may permit changes to aspects of the development. The NSW Government cautions that a completed off-the-plan property may differ from expectations, may be worth less than the amount paid or may settle later than expected.
How Does Finance Work for an Off-the-Plan Investment?
One of the main finance considerations when buying off the plan is that a lender’s assessment made early in the purchase process may not remain valid until completion.
Pre-approval and final loan approval
An initial pre-approval may indicate borrowing capacity based on the investor’s circumstances at that time, but it should not be treated as a guarantee of final approval. Pre-approvals can expire, and a lender may reassess income, expenses, debts and other relevant information before settlement.
Expected rental income may also form part of the assessment, subject to lender policy and acceptable evidence. The amount recognised can differ between lenders.
Valuation and LVR at settlement
A lender may arrange a valuation as settlement approaches. The Loan-to-Value Ratio (LVR) compares the amount borrowed with the property value accepted by the lender.
If the valuation is lower than the contract price, available finance could be affected. Investors may need to contribute additional funds or consider other available finance options, subject to lender requirements and the contract. A valuation from another lender should not be assumed to produce a higher result.
Using Existing Equity for an Off-the-Plan Purchase
Some investors may consider savings or equity in another property when funding a deposit or other eligible purchase costs. Depending on the borrower’s circumstances and lender requirements, using existing home equity could form part of the finance structure.
Available equity does not necessarily equal usable borrowing capacity. Accessing equity also increases borrowing, so existing debt, property value, income, expenses and serviceability may be relevant to the lender’s assessment.
Off-the-Plan vs House and Land Packages for Investors
Both approaches can provide access to newly constructed property, but their finance and contractual arrangements can differ.
With an off-the-plan purchase, the investor typically contracts to acquire the completed property from a developer and settles after completion, subject to the contract. With house and land packages for investors, the investor may instead acquire land and enter into a separate building contract, with construction funding released progressively.
Tax Considerations for New-Build Investors
Tax treatment depends on applicable legislation, the property and the investor’s circumstances. From 1 July 2027, negative gearing of residential property will be limited to eligible new builds, with transitional treatment applying to certain existing investments.
Qualifying off the plan properties for investors may therefore fall within the new build negative gearing framework where the applicable requirements are satisfied. Investors who buy qualifying new builds may also have different Capital Gains Tax (CGT) treatment available under the reforms applying from 1 July 2027.
Purchasing a newly constructed or off-the-plan property should not automatically be assumed to establish eligibility for new build CGT or negative gearing treatment. Registered tax advice may be appropriate based on the rules applying at the relevant time and individual circumstances.
What Should Investors Check Before Signing?
Before signing an off-the-plan contract, investors may wish to consider:
- How much deposit is required and when is it payable?
- What is the expected completion and settlement timeframe?
- What happens if construction or settlement is delayed?
- Can the developer make changes to plans, finishes or the development?
- What do the contract’s sunset provisions allow?
- Could available funds cover a valuation shortfall?
- What happens if borrowing capacity changes before completion?
Investors may also wish to understand how their deposit will be held and review the disclosure material and relevant contract provisions. Legal advice may be appropriate before signing, particularly where provisions relating to delays, plan changes, settlement or sunset dates require clarification.
Requirements and buyer protections can vary between states and territories, so investors should check the rules applying where the property is located.
Conclusion
Buying off the plan can provide access to a newly built investment property, but the time between signing and settlement introduces considerations that differ from purchasing an established dwelling.
For off the plan properties for investors, borrowing capacity, lender policy, settlement valuations, construction delays and changes in personal circumstances could affect the finance available at completion. Expected rent, future property value and tax treatment should also not be assumed.
Understanding the contract, available funds and likely finance process before committing may help investors prepare for different settlement outcomes. Legal, lending and tax guidance may also be appropriate depending on the transaction and individual circumstances.
This article provides general information only and does not constitute financial, tax, legal or credit advice. Australian laws, tax rules, property requirements and lending policies may change, and individual circumstances vary. Consider obtaining advice from appropriately qualified professionals before making property, borrowing, contractual or taxation decisions.
Frequently Asked Questions (FAQs)
1. What does buying off the plan mean?
Buying off the plan usually means entering into a contract to purchase a property before construction is completed. Settlement typically occurs after completion and once applicable settlement requirements have been met, although arrangements can vary.
2. Can investors get finance for an off-the-plan property?
Finance may be available where the investor and property satisfy lender requirements. Because settlement can occur well after signing, borrowing capacity and the property may be reassessed closer to completion.
3. Does pre-approval guarantee finance at settlement?
Pre-approval does not guarantee final loan approval at settlement. It may expire, and changes to the investor’s circumstances, lender policies or property valuation could affect the eventual lending decision.
4. What happens if the property values below the purchase price?
A lower lender valuation could reduce the amount available to borrow, depending on lender requirements and LVR. The investor may need to contribute additional funds at settlement.
5. Can expected rent be considered by the lender?
A lender may consider expected rental income, subject to its credit policy and acceptable evidence. The amount recognised for serviceability can differ between lenders.
6. Is buying off the plan the same as a house and land package?
Not necessarily. An off-the-plan purchaser typically contracts for a completed property, while a house and land package may involve separate land and building contracts.
7. Can an off-the-plan investment qualify as a new build for tax purposes?
It may qualify where applicable new-build requirements are satisfied. Purchasing off the plan should not, by itself, be assumed to establish eligibility for particular negative gearing or CGT treatment.