Banks willing to finance off-the-plan first homes but buyer must take valuation punt

Banks willing to finance off-the-plan first homes but buyer must take valuation punt
Banks willing to finance off-the-plan first homes but buyer must take valuation punt

Banks are willing to provide loans to first-home buyers purchasing a new home off the plan – with the proviso that a lower valuation on settlement could force them to scramble for cash to make up the potential shortfall.

Their response follows a media report suggested the banks are reluctant to lend to off-the-plan first-home buyers.

The concern emerged ahead of changes to the NSW first-home owner grant from October 1, which will provide $15,000 towards a new home (including those bought off the plan) but nothing for first-home buyers purchasing an established property.

CBRE managing director David Milton was reported in the Sydney Morning Herald as saying that banks “frowned” on lending to first-home buyers.

He said the issue was one of confidence for first-home buyers, as banks were only willing to provide a conditional six-month loan approval, when a project could take much longer to complete.

“An off-the-plan project can take from 18 months to over two years to complete,” Milton said.

But he acknowledged to Property Observer that this was not applicable to all transactions and that the scenario of final property valuations being less than the off-the-plan valuation was only a problem when markets are in downturn.

Westpac, Commonwealth Bank, Suncorp and NAB have all told Property Observer they will finance long-term off-the-plan purchases, but with an understandable caveat around the final valuation.

“There has been no change to our first-home buyer policy,” a spokesperson for Westpac tells Property Observer.

“We give people approval in principle if they are buying off the plan. We will do an assessment based on the information provided and all the normal stuff we do in assessing a home loan application,” he says.

The bank will provide a conditional approval for up to for six months, which the bank says gives borrowers an idea if they should go ahead and make the purchase.

“There is the risk element that the apartment will not be built by the time the offer lapses – but there has always been that risk element. It’s the same for people who buy at auction with a long settlement plan,” he adds.

“If it does take longer, the borrower can come back to Westpac and go through the same process of assessment but in the knowledge we have been involved before.

“However, there may be a price valuation difference.”

Suncorp, which has been an active lender to first-home buyers this year, according to AFG figures, will also provide financing for eligible borrowers but has flagged the valuation at settlement as a risk the buyer must bear.

“Banks absolutely want to ensure the quality and value of the end product meets what the developer has specified and agreed to build,” says Suncorp Bank executive manager for personal lending Tony Meredith.

“When a bank agrees to finance a new home construction it is essentially committing to something that is only proposed on paper at the initial stage, which means making sure the end product is in line with this proposal is crucial.

“New construction loan customers are told this up front, so there are no surprises,” he says.

Meredith says customers can also protect themselves and their deposits by ensuring the contract stipulates that the end product needs to meet the market valuation.

The Commonwealth Bank says its provides a conditional loan approval available for up to 18 months if lenders mortgage insurance (LMI) is not applicable and up to six months if LMI is applicable.

To avoid LMI a borrower needs about a 20% deposit.

“Applicants must be able to demonstrate genuine savings of at least 5% of the purchase price, grants or subsidies are not able to be used for the deposit,” says a spokesperson for the Commonwealth Bank.

The bank says it will not accept guarantees from parents in these situations.

As in the case of Westpac and Suncorp, the Commonwealth Bank’s loan approval is conditional subject to a satisfactory “on completion” valuation conducted 90 days before settlement and re-confirmation of the customer's financial details.

“If there are any changes to the security position and / or the repayment capacity, the approval may be withdrawn.”

A spokesperson for NAB says all home loan applications are considered on a case-by-case basis, “taking into account property value, including size and location – as well as the customers' deposit and ability to repay”.

The bank’s home loan applications are valid for 90 days, from approval to settlement, for all property types and buyers.

“This ensures the approved loan amount reflects both the current value of the property and the customers' ability to repay the loan, at settlement.”

Assurances by the banks that they will lend to these borrowers are supported by mortgage broking franchise Mortgage Choice, “provided they have a deposit of at least 5% including evidence of genuine savings, additional funds to cover expenses associated with property ownership, and are able meet the individual lender’s loan serviceability criteria”.

But Mortgage Choice spokesperson Belinda Williamson says raising a deposit of about 10% – even if not required – is particularly important for those buying off the plan to help protect them against valuation variances.

“If the valuation on the completed property comes in lower than the purchase price that was agreed at the time of making a deposit, the borrower will be required to make up the shortfall,” she says.

Williamson says first-home buyers are generally more at risk, “as they often lack the available equity or funds to fill this gap,” she says.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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