Common Mistakes When Buying Off the Plan

Off-the-Plan Purchases Need Different Loan Conditions

An off-the-plan home loan works differently to a standard purchase because the property does not exist when you sign the contract. The delay between contract and settlement can be anywhere from six months to three years, and lenders reassess your application at settlement based on your circumstances and the property's valuation at that time. Your pre-approval might cover the purchase price today, but if your income drops, your expenses increase, or the property is valued lower than expected, the lender can reduce your approved loan amount or withdraw the offer entirely.

Consider a buyer who secures pre-approval for an apartment in a new development with a planned settlement 18 months away. Between contract and settlement, they change jobs, take a pay cut, and increase their car loan repayments. When the lender reassesses at settlement, their borrowing capacity has dropped, and the approved loan amount no longer covers the purchase price. They either need to find additional funds or risk losing their deposit.

How Sunset Clauses Affect Your Finance Timeline

A sunset clause allows either party to walk away from the contract if settlement has not occurred by a specified date. Developers sometimes use this clause to cancel contracts when property values rise, enabling them to resell at a higher price. If a contract is cancelled under a sunset clause, your deposit is typically returned, but you lose the opportunity to purchase at the original price and may have spent money on legal fees, building inspections, and loan application costs.

Lenders issue pre-approval with an expiry date, usually three to six months. If your settlement is pushed back due to construction delays and your pre-approval expires, you will need to reapply. Your financial position or lending criteria may have changed in that time, which can affect your borrowing capacity. Staying in contact with your broker and requesting extensions before expiry helps maintain continuity, but there is no obligation for a lender to extend or reissue on the same terms.

Valuation Risk and the Gap Between Contract and Settlement

Your lender orders a valuation at settlement, not when you sign the contract. If the completed property is valued lower than the contract price, the lender will only provide a loan based on the lower valuation. You will need to make up the difference with your own funds or negotiate with the developer, which is rarely successful once construction is complete.

In areas where large numbers of apartments settle simultaneously, valuations can be affected by oversupply. A precinct that looked undersupplied two years ago may have a glut of new stock by the time your property is ready. The lender's valuer considers recent comparable sales, and if similar apartments in the same development or neighbouring buildings have sold for less than expected, your valuation will reflect that.

Why Income Changes Between Contract and Settlement Create Problems

Lenders reassess your income, employment, and liabilities at settlement. If you have changed jobs, moved from permanent to contract work, taken parental leave, or increased your credit card limits, your borrowing capacity may no longer support the original loan amount. Even a small reduction in hours or a shift to a different industry can trigger a reassessment that results in a lower approved amount.

Some buyers assume that because they have a signed contract, the loan is locked in. It is not. The loan is conditional until settlement, and the lender can adjust or withdraw based on your current financial position. If you are planning any significant changes to your employment or finances after signing an off-the-plan contract, speak to your broker first to understand how it might affect your application.

Fixed Rate Expiry and Rate Lock Limitations

Most lenders do not offer rate locks that extend beyond 90 to 120 days, which is shorter than the typical off-the-plan settlement period. If interest rates rise between contract and settlement, your repayments will be higher than anticipated, which can reduce your borrowing capacity when the lender reassesses your application. A rate increase of even one percent can lower your approved loan amount by tens of thousands of dollars, depending on your income and other commitments.

Some buyers lock in a fixed rate when their pre-approval is issued, assuming it will apply at settlement. Unless the settlement falls within the rate lock period, the rate will revert to the current market rate. If you are concerned about rate movements, discuss options for managing this risk with your broker, including whether a split loan structure might provide some certainty without locking your entire loan amount.

How Deposit Structure Works for Off-the-Plan Contracts

Off-the-plan contracts typically require a deposit of 10 percent, paid in stages. The initial deposit might be five percent on exchange, with the remaining five percent due within a set period, often 30 to 90 days. If your deposit comes from savings, this structure is manageable. If your deposit depends on selling another property, the timing becomes more complicated, and you will need a clear plan to ensure funds are available when each stage is due.

Some buyers use a deposit bond instead of cash, which acts as a guarantee to the developer that the deposit will be paid at settlement. A deposit bond can preserve your savings or borrowing capacity in the short term, but it comes with a cost, and not all developers accept them. If you are considering this option, confirm with the developer before signing the contract and factor the bond premium into your overall budget.

Choosing Between Principal and Interest or Interest Only Loans

For an off-the-plan purchase, your loan structure should align with your financial position at settlement, not when you sign the contract. A principal and interest loan builds equity from the first repayment, which can improve your borrowing capacity if you plan to purchase another property in the future. An interest only loan reduces your repayments during the interest only period, which can help if your income is variable or you are managing multiple financial commitments.

If you are purchasing as an investment, an interest only loan may suit your strategy, particularly if you plan to hold the property long term and rely on capital growth rather than paying down the loan quickly. For owner occupied purchases, principal and interest is usually the more suitable option, as it reduces your loan balance over time and can result in lower overall interest costs. Discuss your strategy with your broker so the loan structure matches your intentions at settlement, not just at application.

When to Apply for Pre-Approval

Apply for pre-approval before signing an off-the-plan contract, not after. Pre-approval gives you a clear picture of your borrowing capacity and confirms that a lender is prepared to support your purchase, subject to final assessment at settlement. Without pre-approval, you are signing a binding contract without knowing whether you can secure the finance to complete it.

Pre-approval also identifies any issues with your application early, such as insufficient savings, high existing debts, or income documentation that does not meet lending criteria. Resolving these issues before you commit to a contract reduces the risk of complications closer to settlement. If your settlement is more than six months away, expect to reapply or extend your pre-approval at least once, and plan for the possibility that lending criteria may have changed in the interim.

Lenders Mortgage Insurance and LVR Considerations

If your deposit is less than 20 percent of the property value, you will pay Lenders Mortgage Insurance, which protects the lender if you default on the loan. LMI is calculated based on the loan amount and the loan to value ratio at settlement, not when you sign the contract. If the property is valued lower than expected, your LVR increases, which may result in higher LMI or a requirement for a larger deposit.

Some buyers plan to avoid LMI by contributing a 20 percent deposit, but if the valuation comes in below the contract price, the deposit percentage drops, and LMI becomes payable. If you are close to the 20 percent threshold, factor in the possibility of a lower valuation and confirm with your broker how much additional deposit you would need to maintain an 80 percent LVR.

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