7 Ways to reduce your apartment settlement risk
When buying property off the plan, there are many risks that you need to be aware of, but one risk that you should keep in mind from the very start is settlement risk.
What is settlement risk?
Settlement risk is the risk that one party such as the buyer is no longer in a position to meet the terms of the contract with another party (such as the lender). The most common reason for this is the buyer not having the funds to take on the mortgage so will have to default instead.
Settlement risk might happen due to the valuation of the completed apartment coming in lower than previously agreed with your lender. This could be because the properties were overpriced from the start, or the property might experience a slower rate of capital growth than expected. In order to settle, you therefore need to come up with the extra funds to cover the shortfall.
Another reason for settlement risk might be that major banks and lenders change their lending policies and make it tougher to get finance. Whatever the reason, there are ways that you can reduce your apartment settlement risk when buying off the plan. Here are 7 ways to reduce your apartment settlement risk today.
7 Ways to reduce your apartment settlement risk
1. Don’t overstretch your finances The first thing to do when buying off the plan property is to buy comfortably within your budget and don’t overstretch your finances. It’s important to give yourself some breathing space in case you need to tap into some additional funds, such as when settlement arrives. It’s therefore best to speak to a reputable Mortgage Broker and determine how much you can borrow from the bank. If your Mortgage Broker tells you that you can borrow a maximum of $500,000, don’t purchase a property for $500,000 as you will also need to take into account other costs such as legal fees, land tax and stamp duty. It’s best to buy a property costing less than $500,000 to be on the safe side.
2. Buy in an area with low supply, high demand Buy your off the plan apartment in an area with low supply and high demand. This will mean that it will make it easier to rent out and sell your property in the future if there is less competition to go up against. Also, do your research on the suburb and look into the future to find out whether there will be any more apartment developments being built, as this could also devalue your property.
3. Buy close to key amenities When buying new apartments off the plan you should also consider the location and buy in a suburb that is close to key amenities such as education, employment hubs, hospitals, retail and dining precincts. This gives more reason for people to want to live here and make your property more desirable.
4. High quality development Another way to reduce your settlement risk when buying off the plan apartments is to buy within a high quality development. Don’t use a dodgy developer who cuts corners and delivers poor quality builds as this will only cause issues in the future which could cost you dearly. Poor quality or discrepancies will also increase settlement risk and could devalue your property.
5. Maintain a point of difference As more and more apartment developments are including gyms, swimming pools and rooftop terraces as standard, it’s important to find an apartment with a point of difference to make your property stand out from the crowd. Having something unique about your apartment will make it easier to sell or rent out, whilst help to maintain good property value. Factors to consider include an apartment with a larger than average floor plan, generous sized balcony, superb views or high quality fittings and finishes such as marble bench tops.
6. Understand the banks and lending policies Lately the major banks have been changing their lending policies making it harder for buyers to get finance. Lending restrictions have been imposed on investors as well as foreign buyers, whilst some banks are also refusing to lend in certain postcodes which they deem risky. Investors who initially believed they could borrow up to 95 per cent of the apartment value from the bank, may now only be able to borrow 80 per cent. When settlement arrives, you might require a larger deposit than originally budgeted for. It’s therefore in your best interests to ensure the property that you do buy sits comfortably within your budget and you use the time until settlement to continue saving in case you do require more funds.
7. Read through your contracts carefully Keep in mind the contract and ensure that you have a good solicitor or conveyancer who specialises in off the plan property to go through your contract with you carefully. There might be a clause that states your lender may not lend the agreed amount following a revaluation prior to settlement. Just make sure you are aware of any lending implications that could affect you.
Although you need to be aware of settlement risk, this risk alone should not deter you from buying a property. The important thing is to have a plan in place and know exactly how you will handle this if this risk was to arise. By following the above advice and buying a high quality project comfortably within your budget, in a good location, this will help to minimise the risk. By using the time between purchase and settlement to continue saving up funds, this will also provide you with a safety net.
Certain areas of Melbourne for example have seen settlement risk occur particularly in the Docklands which is flooded with brand new apartment developments, primarily focused upon foreign investors who now might be struggling to get finance.
At iBuyNew, you can be assured that we do not take on just any project. We carefully choose apartment developments that are well located close to key amenities, in areas that are not oversupplied to ensure that you are buying the best with the least risk as possible.
Get in touch To find out more about buying apartments off the plan and how you can reduce your apartment risk, then it’s best to speak to one of our friendly Property Consultants at iBuyNew who can advise you on the best approach to take.
Give us a call today on 1300 123 463 to find out more and ensure your property purchase is the best purchase possible.
Published on 27th of April 2017 by Marty Stanowich