Do you know how to finance an off-the-plan investment?

Understanding Off-the-Plan Investment Property Finance

Purchasing an off-the-plan investment property can be an effective property investment strategy for building wealth property and achieving financial freedom. For property investors in Malvern East and surrounding areas, understanding the specific requirements and investment loan features available is essential when buying an investment property that hasn't been constructed yet.

Off-the-plan properties are purchased before construction is completed, often requiring a deposit with settlement occurring 12 to 24 months later. This timeline creates unique considerations for your investment property finance, particularly regarding interest rate environments and loan valuations.

Investment Loan Options for Off-the-Plan Properties

When considering buying an investment property off-the-plan, you'll need to understand the investment loan products available through banks and lenders across Australia. These investment loan options differ from standard property investor loan products in several important ways.

Most lenders offer both variable rate and fixed rate investment loans for off-the-plan purchases. A variable interest rate provides flexibility and potential rate discounts, while a fixed interest rate offers certainty over your repayments during the construction period. Many property investors choose to lock in a fixed rate at application to protect against investor interest rates rising before settlement.

Key Investment Loan Features and Benefits

The investment loan benefits for off-the-plan purchases include:

• Interest only payment options to maximise tax deductions during the establishment phase
• Principal and interest repayment structures for long-term portfolio growth
• Access to Lenders Mortgage Insurance (LMI) when your investor deposit is less than 20%
• Ability to leverage equity from existing properties
• Rate discount opportunities based on your loan amount and lending relationship

At AXTON Finance, we help clients access investment loan options from banks and lenders across Australia to find suitable investment property rates and loan structures.

Calculating Investment Loan Repayments and Borrowing Capacity

Calculating investment loan repayments for an off-the-plan property requires careful consideration of several factors. Your investor borrowing capacity will be assessed based on your current income, existing debts, and the anticipated rental income from the property.

Lenders typically use a rental income assessment that accounts for vacancy rates and property expenses. Most lenders will only recognise 80% of the expected rental income when calculating your borrowing capacity, accounting for potential vacancy rate periods and claimable expenses.

The loan to value ratio (LVR) is particularly important for off-the-plan purchases. Lenders generally require a lower LVR for these properties, often capping lending at 80% to 90% depending on your circumstances and the property type. A body corporate property may have different lending criteria than a standalone dwelling.

Tax Benefits and Negative Gearing Considerations

One of the significant advantages of purchasing an investment property off-the-plan involves the tax benefits available to property investors. Understanding how to maximise tax deductions is crucial for your overall investment property finance strategy.

Negative gearing benefits can provide tax relief when your claimable expenses exceed your rental income. These expenses include:

• Interest on your investment loan amount
• Property management fees
• Council rates and water charges
• Insurance premiums
• Depreciation on fixtures and fittings (particularly valuable in new properties)
• Body corporate fees where applicable
• Stamp duty (in some circumstances)

Off-the-plan properties typically offer higher depreciation benefits compared to established properties, providing enhanced tax deductions in the early years of ownership. This contributes to your passive income strategy and helps build wealth through property investment.

The Investment Loan Application Process

The investment loan application process for off-the-plan properties differs from standard property purchases. Timing is crucial, as you'll need to consider both pre-approval and formal approval stages.

Most lenders will provide pre-approval based on the contract of sale and development plans. However, the formal valuation occurs closer to settlement, which can create challenges if property values have changed during the construction period. This is where working with experienced mortgage brokers becomes valuable.

Our team helps Malvern East clients structure their investment loan application to account for:

• Sunset clauses in the purchase contract
• Potential valuation shortfalls
• Changes in lending policies during construction
• Income and employment verification requirements
• Evidence of genuine savings for the investor deposit

Interest Only Investment Loans vs Principal and Interest

Choosing between interest only investment and principal and interest repayment structures depends on your property investment strategy and cash flow requirements.

Interest only investment loans offer:

• Lower monthly repayments
• Greater tax deductions on the full loan amount
• Improved cash flow for acquiring additional properties
• Ability to redirect funds to higher-interest debt or other investments

Principal and interest loans provide:

• Equity growth through forced loan reduction
• Lower overall interest costs
• Greater security during market downturns
• Easier approval for subsequent properties through improved loan to value ratio

Many investors start with interest only periods during the establishment phase when rental yields may be lower and holding costs are higher, then transition to principal and interest repayments as the property matures.

Equity Release and Portfolio Growth Strategies

For existing property owners in Malvern East, using equity release strategies can fund the investor deposit for an off-the-plan purchase without using cash savings. This approach allows you to leverage equity from your home or existing investment properties.

Refinancing to release equity can provide the funds needed for your deposit while maintaining your current property holdings. This strategy accelerates portfolio growth and helps you build wealth through multiple properties generating passive income.

An investment loan refinance might also be appropriate if you have existing properties with suitable equity positions. This can provide the investor deposit required while potentially accessing improved investor interest rates.

Lenders Mortgage Insurance Considerations

When your investor deposit is less than 20% of the purchase price, Lenders Mortgage Insurance (LMI) typically applies. For off-the-plan properties, LMI is calculated based on the contract price, which can work in your favour if the property increases in value during construction.

Some investment loan products offer low LMI loans or reduced LMI premiums for certain professions or property types. Understanding these options can significantly reduce your upfront costs when buying an investment property.

Settlement Challenges and Solutions

Off-the-plan settlements can present challenges that don't exist with established properties. Construction delays, valuation shortfalls, and changing lending policies are all potential issues that require professional management.

If the property values below the contract price at settlement, you may need to:

• Increase your investor deposit to maintain the agreed loan to value ratio
• Seek alternative lenders with different valuation approaches
• Negotiate with the developer regarding price adjustments
• Access additional equity from other properties

Working with experienced mortgage brokers who specialise in investment property finance helps mitigate these risks through careful lender selection and timing strategies.

Making Your Investment Work

Successful off-the-plan investing requires careful planning around your rental property loan structure, understanding claimable expenses, and positioning your finances to maximise both cash flow and capital growth. The combination of modern fixtures, depreciation benefits, and potential capital appreciation makes off-the-plan properties attractive for building wealth property portfolios.

Whether you're buying your first investment property or expanding your property portfolio, the right investment loan features and professional guidance make a significant difference to your long-term success.

Call one of our team at AXTON Finance or book an appointment at a time that works for you to discuss your investment property finance needs and access investment loan options suited to your circumstances.