We see a lot in our line of work. We see people trying to eke out an honest living whilst trying to do the right thing by their kids. We see people turning up to work day in day out – even though they may hate every minute of it. We see some genuinely decent people – in the main.
Some of these people – for whatever reason – are convinced that their path to future prosperity is to buy an off-the-plan investment property. As long as they buy from a reputable builder and they’re advised correctly, we don’t have a problem with that. Even if we did, our job is to advise them about their loans. Period.
Where we can advise them – and always do – is that when they place a 10% deposit for that off-the-plan apartment and we obtain a “pre-approval” from a lender, it is quite possible that the same lender may not proceed with the loan in say 12-18 months time when construction has been completed.
The reasons for that may be varied and complex but it can be as simple as:
- A change in the lenders lending policies:
- to exclude off-the-plan apartments
- reduce the LVR for this type of purchase
- increase servicing requirements
- An exclusion of the postcode that your apartment is in
- Regulatory restrictions placed on them by APRA
- Other reasons that have not yet manifested themselves
If you doubt that this can occur, cast your mind back a few months when all our banks excluded overseas revenue from their servicing models. Our office was inundated with Chinese clients holding a meaningless pre-approval and who had placed 5-10% deposits on apartments. Some had to forfeit these deposits while others had to arrange for very expensive alternative funding.
And it’s not just off-the-plan apartment acquisitions that carry the risk of a “fake” approval.
Last year we advised a young couple to save for a larger deposit as it was highly unlikely that we would be able to get credit approval for them to acquire the apartment that they’d been renting – they had 3%. Overlay that with the impending birth of their first child and you have stresses that no-one really needs.
Not willing to take no for an answer, they sought the assistance of a friend of theirs who worked for one of the major brokers aligned to a major bank. They received credit approval. Joy and hurrah.
They placed their deposit down on the apartment and awaited settlement.
Unbeknown to them, the same bank that had approved their loan was conducting an investigation into the conduct of their friend (the one who had obtained approval for them). The bank changed their mind and the vendor would not refund their 20% deposit.
One last example – and one with a much happier ending – was when we received credit approval for a home loan. We informed the client only to have the LMI insurer reject the postcode. There was a few hours of panic while we convinced the bank to try another LMI insurer on their panel. The second insurer approved the policy and thus a potential disaster was averted.
The moral of this article is that a pre-approval isn’t. Even a formal approval can sometimes lead to disaster. But in the main, the system works well.
So, you can have that shiny new off-the-plan apartment. Just be aware of the risks involved and make sure you’re dealing with reputable people in the entire process.
As always, your (reputable) broker should be making you aware of these (and other) risks. If they’re not, find one who will. Better still, call us.