Buying an Investment Property Off the Plan: What You Need to Know Before Signing

Buying an investment property off the plan can be an attractive option, particularly when you're purchasing a new apartment or townhouse in a development that won't be completed for some time.

However, unlike buying an established property, there can be a significant gap between signing the contract and settling the purchase. During that time, interest rates, lending policies, your financial circumstances and even the property's valuation can change.

These factors can have a significant impact on your ability to obtain finance when the property is ready to settle.

At Balcombe Financial, we help property investors understand their borrowing capacity, compare investment loan options and prepare for the financial requirements of settlement.

How Does Financing an Off-the-Plan Investment Property Work?

When you purchase an investment property off the plan, you generally sign a contract and pay a deposit before construction has been completed.

The balance of the purchase price is usually payable at settlement, which may be months or even years later.

Although you may speak to a lender or mortgage broker when signing the contract, formal home loan approval generally cannot be relied upon for the entire construction period.

Most lenders issue pre-approvals for a limited period, commonly around 90 days, although this varies between lenders.

This means your borrowing capacity will generally need to be reassessed closer to settlement.

Lenders will consider your income, existing liabilities, living expenses, credit history and the property's valuation at that time.

Even if your financial position has remained relatively stable, changes in interest rates or lending policies could affect how much you can borrow.

Australian lenders regulated by APRA are generally required to assess mortgage serviceability using an interest rate buffer of at least 3 percentage points above the applicable loan rate.

For example, if your proposed investment loan has an interest rate of 6.50%, the lender may assess your ability to service the loan using a rate of at least 9.50%.

This is one reason why borrowing capacity can change between signing an off-the-plan contract and applying for finance at settlement.

Before committing to a purchase, it's worth discussing your circumstances with a mortgage broker and understanding the potential impact of changes to your financial position.

You can also obtain an initial estimate using our borrowing capacity calculator.

Why Is the Property Valuation So Important at Settlement?

One of the biggest risks when purchasing off the plan is that the property's valuation at settlement may be lower than the original contract price.

Lenders generally calculate how much they are prepared to lend using their own assessment of the property's value.

This is particularly important because property markets can change during construction.

For example, consider an investor purchasing an apartment for $800,000.

At the time of signing the contract, the investor expects to borrow 80% of the purchase price, or $640,000.

However, when construction is completed, the lender obtains a valuation of $750,000.

If the lender is prepared to advance a maximum of 80% of the valuation, the available loan amount would be $600,000.

This creates a $40,000 funding shortfall.

The investor would need to contribute an additional $40,000 towards settlement, on top of their original planned contribution and any remaining purchase costs.

Depending on the lender and the borrower's circumstances, borrowing at a higher loan-to-value ratio may be an option. However, this could involve Lenders Mortgage Insurance (LMI), higher interest rates or additional lending restrictions.

Importantly, a lower valuation does not generally reduce the amount the purchaser is contractually required to pay.

This is why maintaining sufficient savings or access to additional funds can be particularly important when purchasing off the plan.

What Happens if Your Borrowing Capacity Changes Before Settlement?

A lot can change between signing a contract and settling a property.

You may change jobs, become self-employed, take on additional debt or experience changes in household income.

Interest rates and lender credit policies may also change.

For example, an investor who qualified for a $650,000 loan when signing a contract may only qualify for $580,000 when the property is completed.

If the purchase requires the original loan amount, this could create a significant problem.

Unlike a standard property purchase with a relatively short settlement period, an off-the-plan contract may require the buyer to commit well before finance can be finalised.

If finance cannot be arranged at settlement, the purchaser may face serious contractual consequences, including the potential loss of their deposit and other financial liabilities.

Having a finance clause in the contract may provide some protection, depending on its wording and timing, but buyers should not assume that a clause protecting them shortly after signing will also protect them years later.

Before signing, it is important to have the contract reviewed by a solicitor or conveyancer who understands off-the-plan purchases.

From a lending perspective, a mortgage broker can help assess your borrowing capacity and identify potential risks that may affect finance approval closer to settlement.

Should You Choose Interest-Only or Principal and Interest Repayments?

Investment property loans are commonly structured with either principal and interest repayments or an initial interest-only period.

The most suitable structure depends on your financial circumstances, investment objectives and longer-term plans.

With principal and interest repayments, each repayment covers interest and reduces the outstanding loan balance.

With an interest-only loan, repayments initially cover the interest charged, meaning the loan principal generally remains unchanged during the interest-only period.

Interest-only repayments can provide greater short-term cash flow flexibility, but they also have important implications.

Consider a $500,000 investment loan with an illustrative interest rate of 6.75% per annum.

The approximate monthly repayments would be:

• Interest-only: $2,813.
• Principal and interest over 30 years: $3,243.
• Principal and interest over the remaining 25 years after a five-year interest-only period: $3,455.

In this example, interest-only repayments are approximately $430 lower each month during the initial period.

However, at the end of five years, the borrower still owes the original $500,000, assuming no additional repayments have been made.

The loan must then be repaid over the remaining 25 years, resulting in higher monthly repayments than if principal and interest repayments had commenced from the beginning.

These figures assume the interest rate remains unchanged and are for illustration only. Actual rates, fees and repayment amounts will depend on the lender and loan structure.

Interest-only loans can also be assessed differently for borrowing capacity purposes, with lenders generally considering the shorter remaining principal repayment period.

The decision should therefore consider both immediate cash flow and the longer-term cost of the loan.

You can explore different repayment structures using our mortgage repayment calculator.

Does Negative Gearing Apply to Off-the-Plan Investment Properties?

Changes to Australia's negative gearing rules have made the distinction between new and established investment properties particularly important.

From 1 July 2027, eligible new residential properties can continue to benefit from negative gearing arrangements that allow qualifying net rental losses to be deducted against other taxable income.

For established residential investment properties acquired after 7:30 pm AEST on 12 May 2026, different rules apply from the 2027–28 financial year.

Under these rules, affected net rental losses generally cannot be offset against salary or other non-property income. Instead, they may be offset against eligible residential property income, including certain capital gains, or carried forward to future years.

Investors purchasing off-the-plan apartments should therefore establish whether the completed property qualifies as an eligible new build under the relevant legislation.

The fact that a property is marketed as new or off the plan does not automatically establish its tax treatment.

For eligible investment properties, deductible expenses may include interest on borrowings used for investment purposes, property management fees, council rates and certain other holding costs.

However, the principal component of mortgage repayments is not tax deductible.

The tax treatment of an investment property will depend on the property, ownership structure and investor's individual circumstances.

Before purchasing, investors should seek advice from their accountant regarding negative gearing, depreciation and any potential capital gains tax implications.

What Other Costs Should Investors Consider?

Mortgage repayments are only one component of the cost of owning an investment property.

For apartments and townhouses, ongoing expenses can be significant and should be considered when assessing the property's expected cash flow.

These may include:

• Owners corporation fees.
• Council rates and water charges.
• Landlord insurance.
• Property management and leasing fees.
• Repairs and maintenance.
• Land tax, where applicable.
• Periods when the property is vacant.

New apartment developments may also have substantial owners corporation costs, particularly where the building includes lifts, shared facilities or extensive common areas.

Investors should also consider the possibility that rental income may be lower than originally anticipated.

When assessing borrowing capacity, lenders generally apply a discount to expected rental income to allow for expenses and potential vacancies.

Many lenders use approximately 80% of gross rental income for servicing purposes, although the treatment varies between lenders.

For example, a property expected to generate $650 per week in rent may have only $520 per week recognised in the lender's borrowing capacity assessment.

This can affect the amount an investor is able to borrow.

Before signing a contract, it is worth obtaining a realistic rental appraisal and preparing a cash flow estimate that includes both the mortgage repayments and ongoing property expenses.

What Should You Check Before Signing an Off-the-Plan Contract?

The contract itself is just as important as the finance arrangements.

Off-the-plan contracts can contain provisions relating to construction timeframes, changes to plans and specifications, settlement requirements and sunset dates.

A sunset clause generally sets out circumstances in which a contract may be terminated if a specified event, such as registration of the plan of subdivision, has not occurred by a particular date.

Victorian law places restrictions on how developers can use certain sunset clauses, but buyers should still obtain independent legal advice about their rights and obligations.

It is also important to understand what happens if construction is delayed or the completed property differs from the original plans.

From a finance perspective, buyers should consider whether they have sufficient funds available if the property valuation falls short or their borrowing capacity changes.

A solicitor or conveyancer should review the contract before it is signed, while a mortgage broker can help assess the proposed lending arrangements and identify potential finance risks.

When Should You Arrange Finance for an Off-the-Plan Purchase?

Ideally, you should speak with a mortgage broker before signing the purchase contract.

Although formal loan approval may need to be obtained closer to settlement, an initial assessment can help you understand your borrowing capacity and identify suitable lenders.

During construction, it is sensible to review your financial position periodically, particularly if your income, employment or existing debts change.

As settlement approaches, the finance process generally becomes more detailed.

This may involve updating income documents, obtaining a lender valuation, confirming the required loan amount and completing a full credit assessment.

The timing will depend on the development and lender requirements, but leaving finance arrangements until the last minute can create unnecessary pressure.

Planning ahead gives you more time to address potential issues before settlement.

Review Your Investment Loan After Settlement

Once the property has settled and tenants have moved in, it is worth reviewing your investment loan periodically.

Interest rates, rental income, property values and your personal financial circumstances can all change.

A loan structure that suited you at settlement may not remain the most appropriate option several years later.

Reviewing your loan can help determine whether your interest rate remains competitive, whether your repayment structure is appropriate and whether refinancing may offer any benefits.

At Balcombe Financial, we can help assess your existing investment loan and compare available options from our lender panel.

You can also learn more about our loan health check service.

Speak to Balcombe Financial Before Buying Off the Plan

Buying an investment property off the plan requires careful financial planning, particularly when settlement may be months or even years away.

At Balcombe Financial, we help property investors across Murrumbeena, Bayside and Melbourne understand their borrowing capacity, compare investment loan options and prepare for the financial requirements of settlement.

Whether you're considering your first investment property or adding to an existing portfolio, we can help you assess your lending options and understand the potential risks before committing to a purchase.

Contact Michael at Balcombe Financial to discuss your off-the-plan investment finance options, or book an appointment at a time that suits you.