Blog

Can you exit an off-the-plan purchase?

September 3, 2019

Are you considering buying a property off the plan? It’s a great idea on paper. You get a brand-new home and a nice chunk of time to save up for it. Combine that with the possibility of stamp duty concessions and other first-home buyer benefits and it seems like a no-brainer. But there are hidden risks to navigate that you need to be aware of first.

What does ‘buying off the plan’ mean?

When you buy ‘off the plan’, the property isn’t built yet. Typically, you’ll only have to pay the deposit upfront, and then the balance of the purchase price once the property is completed. Because an off-the-plan purchase is a new-build home, you may qualify for stamp duty exemptions or first-home-owner concessions, depending on your circumstances and the state that you live in.

Why are off-the-plan purchases so hot right now?

It all comes down to stamp duty: a usually compulsory tax on the value of your home. In 2023, the NSW First Home Buyers Assistance Scheme was amended and the threshold for stamp duty concessions increased. Now, eligible first-home buyers purchasing property in NSW for less than $800,000 (previously $650,000) don’t have to pay stamp duty. Plus, eligible first-home buyers can now receive a discount on stamp duty when purchasing property between $800,000 and $1 million.

These changes have led many new buyers to take the plunge on off-the-plan purchases within those ranges. Some have even saved up to $30,000 in stamp duty fees. In a market where every dollar counts, that sounds like thirty thousand very appealing reasons to bite the bullet on an off-the-plan purchase.

What are the benefits of buying off-the-plan?

There are a handful of solid benefits to consider when buying off-the-plan:

• • Sometimes there’s a lower deposit required. Developers understand that buying property based on plans rather than a finished build can be unappealing, and so might allow lower deposits to offset this.

• • You have a longer period to save and make a larger monetary contribution to the purchase. Once you make the initial deposit, you won’t have to pay your purchase off until the build is complete. You can use this time to save money and make a larger mortgage repayment when the time comes, potentially knocking a few years off the term of your loan.

• • You can build up equity. If the market improves from the time that you pay your deposit, you can benefit from any equity gains that happen.

What are the risks of buying off-the-plan?

Lenders may offer conditional approval for off-the-plan purchases, but it will only be valid for 90 days. Unfortunately, this means the conditional approval will likely expire before you can settle. Also, the lender won’t lend you the funds until they have performed a property valuation upon completion of the build. 

In the past, buyers have been caught out because their off-the-plan property was valued at less than the agreed purchase price. The lender would not lend the amount required to complete the sale, and many buyers had to walk away empty-handed.

There may also be other risks with purchasing an off-the-plan property, including:

• The final build may differ from your expectations. Developers can amend the building plans within reason, so you may end up with a different layout, fixtures or fittings than you expected.
• There may be delays or the development may not go ahead. Your deposit should be refunded if the development does not go head this happens, but in the meantime, your money will have been tied up.
• Your money may be at risk if the developer holds on to your deposit (rather than putting it in a trust account) and goes bankrupt.
• Your financial situation may change significantly between committing to your purchase and the build completion.
• Interest rates may rise or banks might change their policies, impacting your borrowing capacity or causing unexpected expenses which may hinder your ability to make repayments.

How to terminate an off-the-plan purchase

Terminating an off-the-plan contract can be tricky, but there may be grounds to do so. For example, if the vendor has engaged in misleading conduct or doesn’t complete construction before the sunset date, you may be able to terminate the contract.

However, if you want to terminate the contract because a lender has valued the completed property at less than the agreed purchase price, you may find it difficult. You could lose your deposit and may have to compensate the developer for any loss.

Seek legal advice about your options if you wish to terminate an off-the-plan contract. More importantly, ask your solicitor to examine any contract before you sign, to ensure you have appropriate exit clauses in place – more about this below.

Selling before the settlement date

Some buyers decide they want to sell the property before settlement. This is legal under most off-the-plan contracts and can be lucrative if the property’s value has gone up, but there are risks involved.

Key considerations:

• Have your conveyancer check that the contract allows for re-sales prior to settlement.
• Speak to your accountant about the tax implications of reselling the property (you’ll likely be up for capital gains tax).
• You’ll have to pay stamp duty, additional legal fees and any agent’s commission, so make sure you factor these costs into your calculations.
• If you find a buyer but your contract with them falls through, you’ll still be bound to settle with the developer.
• Ask the developer to include a clause in the contract that allows you to terminate it if the completed property is valued at less than the agreed price.

If you decide to go ahead with your off-the-plan purchase, Connected Finance can help organise pre-approval on your home loan and help you choose a lender that will work with you on this type of purchase. We can also refer you to a reliable conveyancer or solicitor to help you avoid the legal pitfalls.