The Importance of a Plan B for your Off-Plan purchase
31 July 2017 MO'R Mortgage Options
We have spoken about off-plan property purchases before. Here we cover what an off-plan purchase is. And here, we mention the things you need to consider when committing to one.
Due to the unprecedented level of change in the lending environment, we wanted to add to the conversation about an off-plan purchase to ensure you’re completely across the risks and doing everything you can to minimise them.
The first step if you’re considering purchasing a property off-plan, is to get your finances checked. This means you need to get someone (preferably us!) to look at your personal situation, perform calculations and compare the scenarios to determine your best borrowing options.
Even though you won’t formally apply for the loan until the property is nearly completed, it’s still worth while checking whether a lender would lend you funds now. That is, if you were applying for the finance today, would a lender would approve your loan based on your current financial situation, today’s rates, servicing requirements and credit criteria?
The second step is to think about anything that could happen between now and when the property is due to be completed. Remember that things are almost never completed on time, particularly when it comes to apartment complexes, so we suggest adding a buffer of six months to the proposed completion date.
Is there anything likely to happen between now and then to affect your financial position?
Here are a few things to consider:
· Are you planning a career change?
· How secure is your employment?
· Are you planning for a baby?
· Do you expect your rent to increase significantly?
· Are you planning to take out a personal loan or lease for a new vehicle?
· Is it likely you need to take a step back from work for a period of time, to care for a family member?
· Is there any upcoming event that may require you to dip into your current savings?
· Is there anything that may prevent you from continuing to build up your savings?
Any of the above will potentially impact your borrowing capacity and your ability to get finance approval for your off-plan purchase.
For example, if you’re in a ‘probation period’ for a new job when the property is about to be completed, it could affect the lender’s likelihood of approving a new loan.
Similarly, if you have additional expenses to cover when it’s time to apply for the new loan (i.e. this could be a new car lease, another credit card, or dare we say – another mouth to feed!), it could significantly impact your ability to secure finance for the purchase because your monthly expenses are now higher.
Expecting some of the above to happen *may not* be a deal breaker, as it really depends on your personal situation and how much capacity you have to cover the proposed loan repayments. However, if helps to be upfront about these when we perform the initial calculations for you as it will allow us to provide a more accurate assessment of how likely it is a lender will approve your finance application when you need it.
Regardless of whether you expect your financial situation to change, you need to be confident that your financial position will be strong enough at the time to get finance approved.
Given we feel we’ve had more changes to the lending environment in the last 6 months than we have in the last ten years, this is getting trickier. We cannot be sure what lenders will do with their rates, policies, or servicing criteria between the time you sign the contract and the time you apply for finance. It’s hard to predict the next month, let alone 12-18 months time from now!
Before you commit to an off-plan purchase, you need to have a Plan B up your sleeve.
More often than not, this means you need to be confident you can access additional funds to contribute towards the purchase, in the event you cannot secure finance for the amount you were hoping for.