What first home buyers need to know about government incentives, home loan approval and the financial risks of purchasing an apartment or townhouse before construction is complete.
Buying an apartment or townhouse off the plan can be an attractive option for first home buyers, particularly when government incentives and reduced upfront deposit requirements are available.
For buyers considering a new property in Carnegie or elsewhere across Melbourne, purchasing off the plan may provide an opportunity to enter the property market while allowing additional time to save before settlement.
However, buying off the plan is different from purchasing an established home.
You may sign a contract today but not settle on the property for another 12, 18 or even 24 months.
During that time, interest rates, property values, lending policies and your personal financial circumstances can all change.
Understanding the available government incentives is important, but so is making sure you'll be financially prepared when the property is completed.
What Is Buying Off the Plan?
Buying off the plan involves purchasing a property before construction has been completed, and sometimes before building work has even commenced.
The purchaser generally enters into a contract based on architectural plans, specifications and proposed completion dates.
An initial deposit is usually payable when contracts are exchanged, with the remaining purchase price due at settlement.
Unlike buying an established property, there can be a considerable gap between signing the contract and arranging the final home loan.
This creates both opportunities and risks.
Buyers may benefit from government incentives and additional time to accumulate savings, but they also need to be prepared for changes in property valuations, interest rates and borrowing capacity before settlement.
Stamp Duty Concessions for Off-the-Plan Purchases in Victoria
One of the potential benefits of purchasing off the plan in Victoria is access to land transfer duty concessions.
Eligible first home buyers can receive a full stamp duty exemption where the property's dutiable value is $600,000 or less, with a reduced amount of duty payable on dutiable values above $600,000 and up to $750,000.
These benefits are subject to eligibility requirements, including principal place of residence obligations.
Victoria also offers a temporary off-the-plan duty concession for eligible apartments, units and townhouses within strata developments that have common property.
This temporary concession applies to contracts entered into between 21 October 2024 and 20 April 2027, inclusive.
It allows eligible purchasers to reduce the property's dutiable value by excluding qualifying construction costs incurred after the contract date.
Importantly, the temporary concession:
- Is available to eligible first home buyers, other owner-occupiers and investors.
- Has no property value ceiling.
- Does not require the purchaser to occupy the property.
- Applies to eligible strata developments with common property.
- Is determined by the contract date rather than the settlement date.
The amount of duty saved will depend on the contract price, the stage of construction when the contract is signed and the applicable calculation method.
After the temporary concession expires, the existing off-the-plan concession continues for purchasers who satisfy its more restrictive eligibility requirements.
A conveyancer or solicitor should confirm the applicable concessions before you sign a contract.
Victorian First Home Owner Grant: Are You Eligible?
Eligible first home buyers purchasing a newly constructed property in Victoria may qualify for the $10,000 First Home Owner Grant.
The grant generally applies where:
- The property is a qualifying new home.
- The contract price is $750,000 or less.
- The applicants satisfy the relevant first home buyer eligibility requirements.
- The property will be used as their principal place of residence.
- The required occupancy conditions are met.
For off-the-plan purchases, the $750,000 threshold applies to the contract price, not the reduced dutiable value used for calculating stamp duty.
This is an important distinction.
A buyer may qualify for an off-the-plan stamp duty concession on a property priced above $750,000 but not qualify for the $10,000 First Home Owner Grant.
Understanding the difference between these incentives can help avoid incorrect assumptions about the funds available at settlement.
Can You Buy Off the Plan With a 5% Deposit?
Eligible buyers may be able to purchase an off-the-plan property with a deposit as low as 5% through the Australian Government 5% Deposit Scheme.
The scheme allows eligible purchasers to obtain a home loan through a participating lender without paying lenders mortgage insurance, subject to the scheme's conditions.
For eligible properties in metropolitan Melbourne, including Carnegie, the property price cap is currently $950,000.
Other parts of Victoria have different caps, so the property's postcode and applicable classification should be checked.
Both the purchase price and the lender's assessed property value must fall within the relevant cap.
However, there are several important considerations.
A 5% deposit doesn't guarantee home loan approval.
Borrowers must still satisfy the participating lender's credit assessment, including income, living expenses, existing debts and repayment capacity.
Buyers also need to budget for legal fees, stamp duty where applicable, settlement adjustments and other purchasing expenses.
Importantly, the deposit required under a lending arrangement may differ from the initial deposit payable under the contract of sale.
This is particularly relevant for off-the-plan purchases, where the final property valuation may differ from the agreed purchase price.
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The Biggest Risk: What Happens if the Property Valuation Falls?
One of the most significant risks associated with buying off the plan is a lower-than-expected property valuation at settlement.
When you sign an off-the-plan contract, you agree to purchase the property at a fixed price.
However, the lender will generally require an acceptable valuation before providing finance at settlement.
If property values decline during construction, the completed property may be valued below the original contract price.
Consider the following hypothetical example:
| Property details | Amount |
|---|---|
| Contract purchase price | $750,000 |
| Expected loan at 95% of purchase price | $712,500 |
| Lender valuation at settlement | $700,000 |
| Illustrative loan at 95% of valuation | $665,000 |
| Potential funding shortfall | $47,500 |
In this example, the buyer originally expected to contribute a $37,500 deposit.
However, if the lender calculates the maximum loan using the lower valuation, the buyer may need to contribute an additional $47,500 to complete settlement.
The actual outcome depends on the lender's valuation policy, loan-to-value ratio requirements, any applicable government scheme and the borrower's financial circumstances.
Some lenders may assess the transaction differently, but the example demonstrates why buyers should not assume the original purchase price will automatically support the required lending.
If additional funds cannot be raised, the purchaser may face serious settlement difficulties.
This is one of the reasons we encourage buyers to understand the financial risks before committing to an off-the-plan purchase.
Why Home Loan Pre-Approval Isn't a Guarantee of Settlement
Another important consideration is the length of time between signing the contract and completing the purchase.
A home loan pre-approval obtained today will generally not remain valid indefinitely.
Depending on the lender, pre-approvals commonly have limited validity periods and may require reassessment or renewal.
If your property is not due for completion for another 18 months, your financial circumstances may be very different by the time settlement approaches.
For example:
- Interest rates may have increased.
- Your income or employment circumstances may have changed.
- Your living expenses may have increased.
- You may have taken on additional financial commitments.
- The lender may have changed its credit policies.
- The completed property's valuation may be lower than anticipated.
Any of these factors could affect your borrowing capacity.
Even where a lender has previously provided pre-approval, final finance approval will generally depend on satisfying its requirements at the time of assessment and settlement.
For this reason, buyers should avoid assuming that an earlier pre-approval guarantees the finance required when construction is completed.
Understanding the Impact of Higher Interest Rates
Interest rate movements can significantly affect the affordability of an off-the-plan purchase.
Consider a couple planning to borrow $600,000 over 30 years on a principal and interest basis.
Their approximate monthly repayments would be:
| Illustrative interest rate | Monthly repayment |
|---|---|
| 5.50% | $3,407 |
| 6.00% | $3,597 |
| 6.50% | $3,792 |
| 7.00% | $3,992 |
These figures are illustrative and exclude fees.
A 1.5 percentage point increase from 5.50% to 7.00% would increase repayments by approximately $585 per month.
For a household already managing rent, living expenses and other financial commitments, this could make a substantial difference.
Higher interest rates may also reduce the amount a lender is prepared to advance.
A sound borrowing strategy should therefore consider not just whether repayments are affordable today, but whether they remain manageable if circumstances change before settlement.
Using the First Home Super Saver Scheme
The Australian Government's First Home Super Saver Scheme may provide another way for eligible first home buyers to accumulate funds towards their purchase.
The scheme allows eligible individuals to make voluntary superannuation contributions and subsequently apply to release qualifying contributions and associated earnings towards purchasing their first home.
Up to $15,000 in eligible voluntary contributions per financial year can count towards the scheme, subject to a maximum of $50,000 in eligible contributions across all years.
There are important eligibility, tax and timing requirements.
In particular, buyers should understand the ATO determination process and the deadlines for requesting the release of funds after signing a property contract.
For applicable determinations made on or after 15 September 2024, the release request generally needs to be made within 90 days after entering the contract.
Separate notification obligations also apply.
Because off-the-plan purchases can involve long construction periods, it is important not to assume these deadlines begin at settlement.
Buyers considering this scheme should obtain appropriate tax advice and confirm the current ATO requirements before committing funds.
Construction Delays and Developer Risk
Finance isn't the only risk associated with buying off the plan.
Construction delays can also create financial and practical difficulties.
A project initially expected to be completed within 12 months may take considerably longer because of building delays, labour shortages, planning issues or other circumstances.
This can affect buyers who are renting while waiting for their new property to be completed.
Extended construction periods may mean additional rental expenses, changes to moving arrangements and a longer period of uncertainty.
There is also the risk that a developer experiences financial difficulties or that the completed property differs from the purchaser's expectations.
Before signing an off-the-plan contract, buyers should obtain independent legal advice about the contract terms, including deposit protections, permitted variations, completion provisions and sunset clauses.
These matters are separate from home loan approval but can have a significant impact on the overall purchase.
What About Help to Buy?
The Australian Government's Help to Buy scheme provides a different pathway to home ownership through a shared equity arrangement for eligible purchasers.
Under this structure, the government contributes a portion of the property's purchase price in exchange for an equity interest.
Eligibility requirements, property price caps, income limits and lender participation conditions apply.
Help to Buy should not be confused with the Australian Government 5% Deposit Scheme.
The schemes operate differently, and buyers should not assume they can combine them.
Off-the-plan purchases may also be subject to specific construction and settlement requirements under Help to Buy.
A mortgage broker can help you understand the differences and assess whether an available scheme may be suitable for your circumstances.
How to Prepare Financially for Off-the-Plan Settlement
One of the best ways to reduce the financial risks of buying off the plan is to prepare well before settlement.
Rather than relying solely on your initial deposit and borrowing capacity, consider the following:
Maintain a savings buffer. Additional funds may be required if the lender's valuation is lower than expected or settlement costs increase.
Avoid unnecessary additional debt. New car loans, personal loans or increased credit card limits can affect your borrowing capacity.
Review your borrowing capacity regularly. Don't wait until the developer issues a settlement notice to discover that your financial position has changed.
Understand the contract obligations. Make sure you know when settlement can be called and what happens if finance is unavailable.
Allow time for final loan approval. Lenders may require updated income documents, bank statements and a completed property valuation.
Plan for higher repayments. Consider whether the mortgage would remain affordable if interest rates were higher than originally expected.
A mortgage broker can assist with reviewing your financial position throughout the construction period and identifying potential lending issues before they become settlement problems.
Why Speaking to a Mortgage Broker Early Matters
Buying off the plan can be an appropriate way to enter the property market, particularly for first home buyers who qualify for government incentives.
However, the lending process requires careful consideration because the finance you need at settlement may be assessed under different circumstances from those that existed when you signed the contract.
At Balcombe Financial, we work with a panel of more than 40 lenders and help clients understand their borrowing capacity, available government incentives and the lending requirements associated with off-the-plan purchases.
Our focus isn't simply on obtaining a home loan approval.
It's about helping you understand the financial commitments, identify potential risks and prepare for settlement with greater confidence.
Whether you're considering an apartment in Carnegie, a townhouse in Melbourne's south-east or another off-the-plan development, getting advice early can help you make a more informed decision.
Considering Buying Off the Plan?
Before signing a contract, it's important to understand what you can afford, which government incentives may apply and what could change before settlement.
At Balcombe Financial, we help first home buyers navigate these decisions and explore lending solutions suited to their circumstances.
Contact Michael Flinos on 0429 179 060 to discuss your borrowing options or arrange a home loan assessment.
General information only. Government scheme eligibility, lending policies and financial circumstances vary. Seek independent legal and tax advice where appropriate. All lending is subject to credit assessment and lender approval.
