On this post we explain the main differences between a ‘Land & Construction’ loan and a loan for an ‘Off-the-plan’ property.
A land and construction loan is when you buy a block of land to build a property on. There will be 2 different contracts here: one for the land, which is similar to a standard purchase and one for the construction which includes the plans and specifications of the proposed building.
When it comes to getting a loan for a land and construction, there are a couple of different things to consider before selecting a property:
Is the construction going to start straight after the land purchase settles? If the answer is yes, then usually you can get only one loan account. The lender will release the amount required for settlement of the land and retain funds for the construction which are released in form of ‘progress payments’. These progress payments are included in the building contract and are generally related to the construction stage: base, frame, enclosed, fixing and practical completion.
If the construction won’t start for a few weeks or months but the land purchase is required to settle first, then you will need 2 loan accounts which means 2 loan applications. There are many reasons why the construction process may take longer to start but is usually related to how long the Council takes to approve plans for the proposed building.
In both scenarios, the lender will require an ‘as if complete’ valuation. This valuation takes into consideration the current value of the land and proposed cost of construction. Basically, this valuation amount needs to match the land and construction purchase price on contracts and if doesn’t, the buyer is required to cover the difference.
On the other hand, an ‘Off-the-plan’ property is when you pay a deposit to a developer for a property that is being constructed. It usually takes at least one year from when you initially pay the deposit until the property is completed and ready to move in! The settlement date for an ‘off-the-plan’ purchase is usually 2 weeks from when the title of the property is registered and the Government issues an ‘Occupancy Certificate’ authorizing people to live in this recently build property. It is important to start arranging finance between 2 and 3 months before the promised date of completion. It is possible to have a pre-approval in place, only pending a valuation and the ‘Occupancy Certificate’ before unconditional approval.
Once the property is nearly complete, valuations can be performed to determine the current value of the property. Due to current market circumstances, many ‘off-the-plan’ properties have increased in value and some lenders allow the loan amount to be borrowed against current value of the property and not contract price. For example:
Property purchase price is $500,000 on contract signed in 2015. The property is now worth $700,000, so the percentage of loan amount, for example 80%, is calculated on the new value: $560,000. It is also important to note that stamp duty will have been paid on the contract price. Many buyers can take advantage of this by borrowing enough to replenish funds originally used to purchase the property or at least reducing the amount of funds they were planning on spending on the purchase.
If you have any questions about construction loans or buying off the plan, please feel free to get in touch!
The information provided in this website is General Information only, so does NOT take into account your objectives, financial situation and needs. Before acting on any information contained in this website you should consider the appropriateness of the advice having regard to your objectives, financial situation and needs.
