New home loans: How to pay for a house-and-land package or off-the-plan apartment
Paying for a house-and-land package or an off-the-plan apartment is a little more complicated than for an existing home.
Depending on the property, lenders have different requirements and loans to suit the home you’re considering.
Getting approved for a mortgage is harder today than it was a few years ago, according to Home Loan Experts managing director Otto Dargan, so the first step is to talk to a mortgage broker or your bank and find out if you qualify for a loan.
Paying for a house and land package
Most lenders provide loans for house-and-land packages, but be aware that you’ll need a construction loan and some lenders won’t offer these to people who are self-employed or have a bad credit history.
“We find that some lenders are really good at construction loans while others are a nightmare,” says Dargan. “Going with the right lender can mean a lot less headaches for you and your builder.”
A construction loan often has a higher interest rate compared with a regular home loan, but is only in place for the duration of the build.
Money is drawn down in stages as the build progresses, which means you only pay interest on the outstanding balance, not on the agreed maximum loan amount.
Pre-approval is the first step
Obtaining pre-approval eases the stress when deciding what to buy, as it gives you a clear budget to work with.
Dargan says you’ll need your two most recent payslips, your ID, a recent statement for any debts or credit cards and three months’ worth of bank statements.
“If you’ve found a property, then let your mortgage broker know and they’ll ask for the tender or building contract, plans, specifications, contract of sale for the land and a few other documents depending on the state requirements,” he says.
How much can you borrow?
Dargan says you may be able to borrow up to 95 per cent of the property value. The value is obtained by adding together the purchase price of the land plus the cost of construction, or the valuation completed by the lender, whichever is lower.
If you borrow more than 80 per cent of the property value you’ll need to pay lenders mortgage insurance (LMI), which can be a substantial sum. Borrowers with a 95 per cent loan to value ratio (LVR) could be looking at LMI upwards of 3 per cent of the loan amount.
Dargan says to make sure your land contract and building contract has a “subject to finance” clause or a cooling off period, as sometimes the lender’s valuation comes in low and you’ll need to pull out of the purchase. Legal advice from your solicitor before signing will pay off here.
How are progress payments made?
Dargan says the lender will pay your builder directly as each stage of your home is completed.
“Typically, people have problems with the first and last progress payment,” he says.
The first progress payment is only released when certain requirements are met such as the council approved plans, insurances and other documents being provided. However, the builder often requires a 5 per cent deposit in advance so you’ll either need to negotiate with the bank or have surplus funds available.
“The last progress payment will only be made by the bank when all the work is done so make sure you check that the house is 100 per cent complete before letting the builder request payment from the bank,” says Dargan.
Expect to go over budget
If you change your mind on the type of tiles in the bathroom or the type of window fittings, it’s considered a variation to your contract and you’ll pay both the cost difference and a builder’s margin, so make every effort to finalise all fixtures and fittings before the build begins.
Dargan says there are nearly always unexpected costs as the build progresses, so ideally keep some contingency funds on hand.
Funding an off-the-plan apartment
Bill Nikolouzakis, chief executive of iBuyNew Group, says the most important factor in securing a loan for an off-the-plan purchase is to choose a quality property where the bank’s valuation closely matches the purchase price.
“Most finance will come down to the quality of the asset,” he says. “If you’re buying in an area with too much supply or where the apartment sizes are too small there will be lender restrictions.”
“For a good-quality property, the lending environment is the same as financing an existing home.”
LVR requirements
Many lenders cap loans for off-the-plan properties at 80 per cent, which means you’ll need to come up with 20 per cent of the purchase price.
This is because a property’s value may decrease between the signing of the contract and completion of the build, and the banks are covering their risk in the event a person has to sell quickly.
In some cases, banks might require as much as a 50 per cent deposit. This can change from month to month, so check with your broker.
Paying the deposit
Nikolouzakis says developers generally require a 10 per cent deposit to secure an off-the-plan property, although in Sydney and Melbourne where the market has slowed lenders may accept smaller deposits.
You may also be able to use a deposit bond with a one-off fee instead of a cash deposit when making your purchase. This means your can leave your own funds to continue earning interest while the property is being built.
Finalising your purchase
The balance of the purchase price will be due on settlement, when the building is complete.
Make a thorough inspection of your apartment before paying the balance. You’ll have more leverage to have problems fixed if the developer is still waiting on your money, although you need to remain within the boundaries of the contract.
Experience pays off
Nikolouzakis says his best piece of advice is for buyers to talk to a variety of mortgage brokers and find one that has experience with off-the-plan financing.
“There are contractual issues they might not be used to,” he says. “Off-the-plan contracts are far more complex than a contract for an existing property, so someone who hasn’t done a lot of off-the-plan lending might be confused.”
