We have all seen the headlines of someone making a motza after buying a property off plan. But behind the scenes there is often a mortgage broker who has worked really hard to turn your dreams into reality.
And, as the property markets peak, we could be seeing stories of people losing their savings on off-plan developments. Here are some examples of what could happen.
Valuation comes in up
If you put down a deposit of a property in 2013 or before, the chances are that the value of any property sale completing today will be higher than the contract price.
Result: you pat yourself on the back for being an astute investor, order another bottle of Moet and talk to your broker about purchasing another property
Valuation comes up and you avoid paying Lenders Mortgage Insurance
If you are borrowing more than 80 per cent of the value of a property, lenders ask you to take out Lenders Mortgage Insurance. Property buyers who paid a 10 per cent deposit for an off-plan purchase in, say, 2013 normally find themselves in a very happy position. The buyer may have been looking to borrow the remaining 90 per cent of the contract price. But, because the value of the property has now gone up, the loan amount now only equates to 80 per cent of the property value meaning that the buyer avoids paying Lenders Mortgage Insurance (and probably getting a lower rate too).
But not all banks are the same. When it comes to valuations, some banks will just go off the contract price no matter what the valuer states. If you just went to your bank you would not know what its policy is. Here is where a good broker kicks in; s/he will be able to take you to a lender will use the higher of the valuation of contract – potentially saving you thousands.
Banks change their lending policies in the months or years between you paid your deposit.
This has happened a lot recently and a number of investors have been burnt. The Australian Prudential Authority (APRA) has forced the banks to be more conservative in their lending policies for investors.
Result: the bank may not lend you as much as you wanted. Hopefully you used a broker when you put down your deposit who warned you that things could change so you had already factored in some contingency plans.
The valuations comes in down – and you are under water
This is the one that keeps people awake at night. While there is not much evidence of it yet, it will come. People who placed a deposit at the top of the market often find that, when it comes to completing the purchase, the property is worth less than they paid for it (as investors in mining towns are now finding out).
As the bank won’t lend you as much as you need, you will have to fork out more of your own money to make-up the shortfall. If you don’t have the money, you risk losing the property.
If your valuation comes in down, your broker may be able to help by arranging an alternative valuation in the hope that it comes in with a higher figure. Or your broker may be able to work with real estate agents to provide evidence that challenges a low valuation.
Throughout the process of buying off-plan your broker can assist you. Hopefully you engaged your broker at the early stages. If you chose a good broker s/he may well have set you up for success.