Real Estate Finance

SellNewBuyNew | 12 September 2018

How you can minimise your risk?

Once you have been pre approved for a loan, it's easy to assume the bank will lend you the funds once settlement comes around. While 'pre approved' does not mean 'guaranteed' in any circumstance, it is more so the case when it comes to buying an off the plan property.

Knowing some of the reasons why this is the case will help you minimise the chances of this happening to you.

The first question to be answered is -

Why would a lender go back on their pre-approval for a loan? Especially if your financial circumstances have remained the same.

What buyers need to understand is, the pre approved loan amount is based on all the information that was valid at the time the purchase contract was signed.

On top of the buyer's earnings, the lender has also taken into account current interest rates, the trend of the property market and the projected value of the unbuilt property.

If any of these circumstances change considerably between the time of purchase and the settlement date, the lender may refuse to loan the initial amount agreed.

The reason why this is important to note for off the plan purchases is because the settlement date can be 12-24 months after the contract is signed. In the meantime, the estimated value of the property could be lower or interests rate may have increased.

For the buyer, this means they would need to pay the discrepancy between the initial amount quoted and the actual amount approved out of their own pocket. Another option is to find another lender to loan them the discrepancy amount but the chances of getting a bad deal are high.

If the buyer cannot find a way of financing at settlement, he or she could potentially lose their deposit, as well as pay any fees issued by the developer for breaking the purchase contract.

What can you do to minimise the risk of this happening to you?

1. Remember that 'pre-approved' does not equal 'guaranteed'.

Go through your pre approved contract thoroughly, particularly if they have stated they may not agree to lend following a revaluation prior to settlement. It would be wise to employ your solicitor to further look at the conditions of your pre approval.

2. Be conservative with your maximum spend limit.

While the lender may have pre approved a certain amount and you are only required to leave a 10% deposit, consider buying a property that is less than what the lender is willing to lend.

If your property is given a lesser value at it's completion, you may still be able to borrow the amount required.

3. Check the final product. Then check again.

You should have a full list of all the features your property will have once it is built; everything from the type of appliances installed, light fittings, and heating and cooling systems. If there is anything important missing from the final product, it could mean an instant devaluation of your property. The developer is obligated to ensure all things are built as agreed upon at purchase.

4. Research beforehand.

Doing a thorough check of the location of the property as well as any other developments close by can give you an indication of whether your property will go up or down in value at the time of settlement.

5. Continue to save.

Use the time in between purchase and settlement to knuckle down on building up your extra savings. You may not need it but there's no harm in saving for that rainy day.