The plight of the off the plan or late settlement buyers during COVID-19

The plight of the off the plan or late settlement buyers during COVID-19
Urban EditorialMay 29, 2020

Dipping property prices, rock-bottom interest rates and less competition at auctions have opened up plenty of opportunities for home buyers, but there’s one segment that isn’t enjoying any of these benefits: off the plan and late settlement buyers. 

These are the forgotten purchasers who bought not-yet-built homes a couple of years ago and those who exchanged contracts prior to March 2020 but now have to settle in the post-COVID lending environment. Right now, these groups are facing two massive problems: 

First, while they may have gotten pre-approved by their lender in the months leading up to the COVID-19 outbreak, that doesn’t count for much anymore. Nowadays, banks and lenders will consider your circumstances when you have to complete on the property, and since COVID-19 many Australians have found themselves on shaky financial footing. Plenty have lost their jobs, or have had their hours cut and their incomes reduced. Many investors are receiving less rent as their tenants cope with the fallout. This has put pressure on lenders to be a lot more discerning when deciding who to do business with. Many are even refusing to consider borrowers in certain industries, even if their circumstances haven’t taken much of a hit. 

The second problem is valuation by banks and lenders of your purchase. With some economists warning that property prices could plummet by up to 30%, valuers are getting jittery. Suddenly, that unit you purchased for $750,000 off the plan a year ago, might only be worth $700,000.  This is bad news for borrowers because now they have to stump up an extra $50,000 to buy a property at a time when families are being stretched beyond their means — and parents may not be able to lend any money to save the day. 

These two big problems may mean that a purchaser won't be able to settle. Even worse, they could lose their 10% deposit and potentially be sued for the difference if the vendor sells to someone else for less money. 

Legislation needed to protect pre-COVID purchasers 

I am extremely concerned about these borrowers. So far, the COVID-affected property cohort has received assistance in the form of repayment deferrals, bans on rental evictions, and reductions in land tax for landlords whose tenants aren't paying full rent. At the same time, the government is still allowing vendors to demand settlement or completion of purchases as booked in pre-COVID. This is extremely unfair to purchasers as they’re being put at risk of losing their deposits and facing litigation. 

The government urgently needs to introduce legislation extending settlement periods for these purchasers by at least 12 weeks, on top of the standard 42 days. Some of the funds being provided to small businesses from the government should also go towards bridging loans for these borrowers. Rates should be kept low and interest capitalised to give them time to get their financial lives back in order so they can complete their purchases. 

All told, something has to be done or there will be a flood of properties to hit the market from those who have found themselves unable to settle, putting the market in an even greater state of disarray than it already is. To those purchasers who are currently in this mess, I would suggest speaking with the solicitor who is taking care of the purchase. Get him to talk to the vendor's solicitor and ask for an extension due to COVID. While they don’t have to agree it's still worth a try. 

ASIC has also advised lenders to  to take the COVID situation into account and ‘exercise their good judgement’ in the principles-based approach to lending. This seems to mean that the banks may start to be more lenient to borrowers and even allow for interest-only loans for an extra 12 months to help reduce the payments the borrower has to make.

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