Why off-the-plan buyers should beware

Twelve months ago John signed up for a $600,000 off-the-plan purchase.

A deposit of 10% was all he needed to secure it. At the time his bank was prepared to lend him up to 95% ($570,000).

Fast-forward and today his bank, thanks to the Australian Prudential Regulation Authority's clampdown, is now only prepared to lend him up to 80% of the value.

John needs to find another $90,000 or another lender who's either willing to lend him more or value the property higher.

If he can't do either, he may have to walk away and, potentially, lose his deposit. John could also be sued by the developer for any loss it incurs on resale.

There have always been risks associated with buying off the plan.

Patrick Bright, a buyers' agent with EPS Property Search, has long said that it should be regarded as a speculative investment, as you're hoping the property will be worth more a year or two down the track.

Putting these risks aside, the issue for John - and I suspect many other investors who have recently purchased off the plan and expect to settle in 12-plus months - is not so much the value of the property but the fact that lenders have changed their policies.

It is important to note that, although dwelling approvals are around record highs and the cycle more than three years into a strong growth phase, CoreLogic says there could be a downturn in values.

In a bid to cool investment book activity, APRA's heavy-handedness with authorised deposit-taking institutions (ADIs) has caused alarm across the off-the-plan industry.

A requirement to hold more capital, combined with a 10% effective speed limit on the annual growth of banks' pool of investor mortgage credit, has seen many lenders make significant, sweeping changes to policies and pricing.

It's the change to loan-to-valuation ratios that is really hurting some investors.

When it comes to getting a loan for an off-the-plan purchase, it's important to understand that what you receive from your lender is a pre-approval, not an unconditional approval to buy.

As Michael Daniels, state manager for Smartline Personal Mortgage Advisers, says: "It's a guide to what the bank is willing to lend you based on all the relevant information as of the time the contract is signed. If there are changes for either the bank or the client, this can considerably change the scenario in terms of what the bank is prepared to lend."

Keep in mind, a pre-approval is only relevant for three months, while it can take one or two years for a large development to be completed.

In general most off-the-plan purchases only require a 10% deposit.

When the property development is nearly completed, the developer issues a 14-day notice to complete. That means the purchaser has to have all finances in order and be ready to settle within two weeks.

"This is normally when there is a rush of activity as the formal finance approval needs to be gained so settlement can take place," says Daniels.

"This requires an entire new loan application process with the property being valued at that time."

Daniels says the issue that investors now face is that many lenders have significantly reduced the maximum amount they are prepared to lend for the purchase of an investment property.

While many lenders have changed policies, Daniels says there are smaller or niche lenders who will still lend on only a 10% deposit.

Daniels also advises that if you have purchased a property initially as an investment and have since moved back into the property as your principal place of residence, then you should talk to your lender to ensure that you are getting charged owner-occupier rates, not investor rates.

Of course if you're an opportunist who is cashed up, sit tight, because the next 12 months could see some seriously cheap inner-city apartments go up for sale.

Smarter banking could save you thousands of dollars on your home loan. Using your banking products in a smarter way can help you pay off your home loan sooner.

One of the simplest ways to pay off your home loan faster is to maintain higher repayments, even when interest rates decline, reducing your loan's principal and the interest payable.

Making repayments more frequently will reduce the amount of interest you pay over the life of your loan because most home loans calculate interest daily.

If you base your weekly or fortnightly repayment on the usual monthly amount divided by four or two respectively, your home loan balance decreases with every payment, attracting less interest over the life of the loan.

This also increases your annual repayments, which most institutions calculate monthly.

You can also use your offset account to decrease the interest calculated on the loan.

By placing your earnings, any lump-sum payments or surplus funds in your offset account, you reduce the balance on which your interest is calculated.

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