How to slash financing risk when you buy off-plan property

Reducing property investment risk to increase your profits

Off-plan property investment has consistently proved to be one of the most profitable of property investment strategies. But, like any investment, it is not without risks. If you’re prepared for these risks, you can put in place plans to reduce them. The risk won’t ever fully disappear, but with a little property investment education, you can slash the potential downside while retaining all the upside.

In this article, you’ll learn about the financing risks associated with off-plan property investment, and how you can minimise them.

What is off-plan property financing risk?

When you invest in off-plan property for sale, you’ll probably pay a deposit of between 10% and 30% of the agreed purchase price. The developer will probably want to be assured that you will complete by seeing that you have mortgage finance to cover the completion price. So, you arrange a buy-to-let mortgage at the time you put your deposit down.

However, most mortgage lenders will only keep the offer of financing open for a maximum of six months. If the completion date is later and the mortgage offer has expired, you’ll have to reapply for the mortgage. If you then can’t get financing, you could lose your deposit. If the developer then sells the property at a lower price than you agreed, you could also be sued for the balance.

The three main financing risks in off-plan property

There are three main risks associated with off-plan financing:

1.      The property is valued lower at completion

When you first agree to invest, your lender will undertake a valuation of the property. They will probably base their valuation on the property specification and future value of the development. At the time of completion, the mortgage lender will revalue the property.

It may be that the general market has softened, and so the valuation comes in lower. Or, perhaps, the specification is not as the lender thought it would be before the build started. Either way, you could be left with a shortfall in financing.

To mitigate these risks, you should:

  • Negotiate as large a discount as possible with the developer. It will provide you with a cushion against a lower valuation and a softer property market.
  • Use a mortgage product with a longer dated offer period.
  • Maintain contact with the developer and regularly check on the development’s progress. Ensure that the original build specifications are being adhered to.

2.      Mortgage rules have changed

You agree your mortgage when you make the decision to invest in off-plan property. You could be waiting for the build to complete for two or three years (or longer). By this time, the mortgage rules could have changed.

For example, new mortgage regulations came into force at the beginning of 2017. These forced lenders to calculate mortgage affordability using a minimum notional interest rate of 5.5%. Simultaneously, many lenders now base their maximum advance on an interest coverage ratio (ICR) of 140% – your rental income must cover the mortgage interest payments 1.4 times.

If the mortgage rules change, you may not be able to get a mortgage as easily as before. To reduce these risks, you could:

  • Keep in touch with the mortgage market, and stay updated with any changes that might affect you. To be forewarned is to be forearmed.
  • Make sure that the off-plan property purchase is a sound one, and that you’re investing with good property fundamentals. It should help ensure that there will be tenant demand for your investment property and that rents will be high.
  • Use a buy-to-let mortgage broker to get the best deal and mortgage terms and conditions.
  • Invest in off-plan property with a short investment-to-completion date, thus reducing the risk that mortgage rules will be changed while you wait for the build to be completed.

3.      Your circumstances change

This final area of financing risk is personal to you. Circumstances change, you could lose your job, get divorced, or suffer an injury that stops you from working. This risk is not about financing suddenly being unavailable, but about you not being able to get it. So, before you invest in off-plan property, take a good look at your personal circumstances. How safe is your job? How solid is your marriage? Do you have any other plans between now and completion that could drain your finances?

Once you’re happy that your financial situation and prospects are steady to good, then it’s time to invest in off-plan property. Take the precautions that are necessary to minimise finance risks, and take the first step to building an investment property portfolio which could provide the lifestyle you dream about.

Do you want to know how off-plan property investment could change your life?

To discuss your financial objectives and receive a personal evaluation of the benefits of off-plan property investment, contact one of our team today on +44 (0)207 923 6100. We’re here to help you make a profitable and hassle-free property investment that allows you to sit back, relax, and enjoy the rewards of your investment.

Live with passion

Brett Alegre-Wood

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