Understanding the Basics of Off-the-Plan Investment Loans

Financing Off-the-Plan Investment Property: What Changes at Settlement

Off-the-plan investment purchases involve two separate contracts and two different finance approvals. You sign a contract with the developer today, but you won't settle until the building is complete, which might be 18 to 36 months away. The property you're financing doesn't yet exist, which changes the way lenders assess your application and the deposit structure you'll need.

Consider a Lisarow resident looking to diversify beyond the local market by purchasing an apartment in a new development on the southern Central Coast. They sign the contract with a 10 per cent deposit, knowing their formal loan approval won't begin until closer to completion. During the construction period, interest rates shift, their employment changes, and the lender's serviceability rules are updated. When the property is finally ready to settle, they need a fresh approval based on current policy, not the conditions that applied when they first signed.

How Lenders Assess Investment Loans for Properties Not Yet Built

Lenders assess off-the-plan investment loans using the completed property's expected value, not the contract price. They require a valuation at settlement based on comparable sales of finished properties in the area, which means your loan amount might be lower than expected if the market softens or if the development doesn't meet valuation expectations. Most lenders cap the loan-to-value ratio at 80 per cent for investment purchases to avoid Lenders Mortgage Insurance, though some will lend up to 90 per cent if you're prepared to pay the premium.

The 3 per cent serviceability buffer applies to all new investor loans, meaning the lender tests your ability to repay at a rate 3 percentage points above the actual loan product rate. From February this year, lenders can only write 20 per cent of new investor loans at a debt-to-income ratio of 6 times or greater, which tightens approval capacity for borrowers with high income relative to the loan size. If you're planning to rely on rental income to service the loan, most lenders will assess only 80 per cent of the expected rent to account for vacancy and maintenance costs.

Deposit Structure for Off-the-Plan Purchases

You typically pay the deposit in stages as construction progresses. A common structure is 10 per cent of the contract price split across several instalments: 5 per cent on exchange, then the remaining 5 per cent in two or three payments over the following 12 months. The deposit is held in a trust account and released to the developer at specific milestones, which gives you some protection if the project stalls.

The remaining 90 per cent is due at settlement once the building is registered and the title is issued. You'll need your investment loan approved and ready to draw down at that point, along with funds to cover stamp duty, legal fees, and any adjustments. For an investor in Lisarow looking at a development elsewhere on the Coast, stamp duty on an investment property is calculated on the full purchase price without any concessions, so factor that into your upfront cost.

Interest-Only Repayments and Negative Gearing After July 2027

Many investors structure their loan as interest-only for the first few years to reduce repayments and maintain cash flow. The interest you pay is deductible against your rental income and other assessable income, which is where negative gearing comes in. If your property costs more to hold than it earns in rent, you can offset that loss against your salary under the current rules.

From 1 July next year, the negative gearing treatment changes for residential investment properties purchased on or after 12 May this year. Net rental losses on affected properties can only be offset against other residential rental income or carried forward to offset future rental income or capital gains. They can't be deducted against your wage. Properties purchased before that date, or eligible new builds that increase dwelling numbers, remain fully deductible. Off-the-plan apartments in a new building on previously vacant land generally qualify as eligible new builds, which preserves the full negative gearing benefit.

What Happens If the Development Delays or the Market Shifts

Construction delays are common, and settlement might be pushed back by six months or more. Your pre-approval will expire well before the property is ready, so you'll need to reapply closer to the expected completion date. If your financial position has weakened or serviceability rules have tightened further, you might not be approved for the same loan amount.

If the market has dropped and the property no longer values at the contract price, the lender will base the loan on the lower valuation. You'll need to cover the shortfall with your own funds or renegotiate with the developer if a sunset clause allows you to exit the contract. In our experience, buyers who lock in a contract during a rising market can find themselves over-committed if conditions reverse before settlement. Speak to your broker early if you're concerned about changes in your circumstances or the market.

Capital Gains Tax and Indexation from July Next Year

When you eventually sell the property, the tax treatment of your capital gain depends on when you purchased and how long you held it. For off-the-plan purchases settling after 1 July next year, the portion of the gain that accrues from that date will be taxed using cost base indexation and a minimum 30 per cent tax rate on the real gain, rather than the 50 per cent discount. If you're buying an eligible new build, you can elect to use the 50 per cent discount instead, which might be more favourable depending on inflation and your marginal tax rate. The ATO has published an apportionment formula if you don't obtain a market valuation at 1 July next year, though the detail is still being clarified in guidance notes.

This isn't a reason to avoid off-the-plan investment, but it does change the after-tax return calculation. Run the numbers with your accountant before you commit, especially if you're planning a shorter hold period.

Settlement Timing and Your Cash Flow

You won't receive rental income until after settlement, but you'll start paying interest on your loan from the day it settles. If the property is part of a larger complex and the common areas aren't yet complete, you might wait weeks or months before you can lease it. Some developments have staged completions, so the first buyers settle while landscaping and amenity areas are still under construction, which can affect the appeal to tenants and the rent you can achieve.

Budget for at least three months of holding costs without rental income. That includes loan repayments, council rates, strata levies, and insurance. If you've structured the loan as interest-only, your repayments will be lower, but the other costs remain the same. Lisarow residents with equity in their own home can sometimes use a split loan structure to manage this period without draining savings, but that depends on your overall borrowing capacity and the lender's willingness to cross-collateralise.

Call one of our team or book an appointment at a time that works for you. We work with lenders across Australia who understand off-the-plan investment finance, and we'll help you structure the loan and timing to suit your situation and the development's schedule.

Frequently Asked Questions