Smart ways to approach off-the-plan investment loans

Off-the-plan purchases lock in today's price for a property you might not settle on for two or three years.

That gap between contract and settlement changes how lenders assess your application, how much you can borrow, and which loan features will work when the property is finally built. If you're a medical professional or Parramatta resident looking at off-the-plan apartments in the CBD or nearby precincts like North Parramatta or Westmead, understanding the finance side before you sign a contract will save you from surprises down the line.

Off-the-plan lending works differently from settled property finance

Lenders approve your loan amount based on your income and expenses at the time you apply, but they reassess your situation closer to settlement. That means your borrowing capacity at contract signing might not match what the lender will actually release when the building is complete. If your circumstances change during the construction period, such as taking parental leave, changing jobs, or adding debt, you may need to renegotiate terms or find alternative finance.

Consider a medical registrar who signed a contract in early 2024 for a two-bedroom apartment in one of the new towers near Parramatta Square, with settlement expected in late 2026. At application, their income supported the full loan amount. By settlement, they had moved from a registrar position to a fellowship with higher but more variable income. The lender treated the fellowship income differently and required additional documentation. The loan was approved, but the process took longer than expected and required updated payslips, tax returns, and a letter from the employer confirming permanency.

Most lenders will provide conditional approval at the time you enter the contract, but that approval is subject to reconfirmation closer to settlement. Some lenders place a time limit on pre-approvals, typically six to twelve months, which means you may need to reapply entirely if construction is delayed.

Deposit structures and payment schedules during construction

Off-the-plan contracts usually require a 10 per cent deposit, paid in stages. A typical structure is 5 per cent on exchange and 5 per cent within 90 days. The deposit is held in a trust account until settlement, and the developer draws down funds as construction milestones are reached. Your loan amount is calculated on the full purchase price, not the amount you owe at settlement, but the deposit you have already paid reduces what you need to borrow.

If you are using equity from an existing property to fund the deposit, the lender will require a valuation of that property and may limit how much you can access based on the loan to value ratio across both properties. Lenders typically allow you to borrow up to 80 per cent of the value of your existing home without paying Lenders Mortgage Insurance, but adding an investment loan on top of an existing mortgage can push your total borrowing above that threshold.

For investors who do not have sufficient equity or savings, some lenders will allow you to capitalise the deposit into the loan, but this usually requires Lenders Mortgage Insurance and results in a higher loan amount and higher ongoing repayments. Stamp duty and other settlement costs also need to be factored in, and these are typically paid from your own funds at settlement rather than being added to the loan.

Valuation risk and what happens if the market shifts

When you buy off-the-plan, the lender bases their loan offer on the contract price or a desktop valuation of the proposed property. At settlement, the lender orders a formal valuation of the completed property. If the valuation comes in lower than the contract price, the lender will only release the amount supported by the valuation, and you will need to cover the shortfall from your own funds.

Valuation risk is particularly relevant in precincts where new supply is concentrated. Parramatta has seen significant apartment development around the CBD and transport corridors, and while demand remains strong due to the area's role as a commercial and health hub, a large number of settlements in a short period can affect individual valuations. Lenders are aware of this and may apply additional scrutiny to buildings where multiple units are settling at once.

If the valuation shortfall is small, you may be able to negotiate with the lender to proceed at a higher loan to value ratio by paying Lenders Mortgage Insurance. If the shortfall is large, you may need to renegotiate the contract with the developer, seek alternative finance, or walk away and forfeit your deposit, depending on the terms of the contract.

Interest only loans and cash flow during the holding period

Most investors purchasing off-the-plan choose an interest only loan for the first few years after settlement. This reduces the monthly repayment and improves cash flow, particularly if the property has a high body corporate fee or experiences vacancy periods while tenants are found.

Interest only periods are typically available for five years on investment loans, after which the loan reverts to principal and interest repayments. The revert date and the impact on your repayment amount should be factored into your long-term planning. Under current lending rules, if your loan to value ratio is above 80 per cent and the interest only period is longer than five years or unspecified, the loan may be classified as non-standard, which can affect the interest rate and the lender's willingness to approve the loan.

Rental income from the property can be used to service the loan, but lenders typically only count 80 per cent of the estimated rent to account for vacancy periods and maintenance costs. If you are relying on rental income to meet serviceability requirements, the lender will require a rental appraisal from a licensed agent before settlement.

New tax rules and how they affect off-the-plan investors

From the 2027-28 income year, losses from established residential investment properties purchased after 12 May 2026 can only be offset against income from other residential properties, not against salary or other income. Off-the-plan properties that qualify as new builds are exempt from this change, meaning you can still offset losses against your salary as before.

A property qualifies as a new build if it is constructed on previously vacant land or if the development increases the total number of dwellings on the site. Most off-the-plan apartments in Parramatta's new towers meet this definition. However, if the property is occupied for more than 12 months before you purchase it, the exemption no longer applies to you as the subsequent investor.

This distinction matters if you are comparing an off-the-plan purchase to buying a recently completed apartment from an investor who purchased off-the-plan themselves. If that investor has already rented the property for more than a year, you will lose access to negative gearing under the new rules, even though the property is still relatively new.

Capital gains tax treatment also changes from 1 July 2027. For properties purchased after that date, you can choose between the existing 50 per cent discount and a new indexed cost base system with a 30 per cent minimum tax rate on real gains. If you purchase off-the-plan before 1 July 2027 but settle after that date, the portion of the gain that accrues before 1 July 2027 is taxed under the old rules, and the portion after that date is taxed under the new rules.

Choosing the right loan structure before you sign the contract

Some investors apply for finance after signing the contract, assuming they have plenty of time before settlement. That approach can work, but it leaves you exposed if your circumstances change or if lenders tighten their policies during the construction period. Getting conditional approval before you sign gives you certainty and allows you to negotiate the contract with confidence.

When you apply, consider whether you want a variable rate, a fixed rate, or a split. Fixed rates provide certainty over your repayments for a set period, but they usually come with restrictions on extra repayments and may incur break costs if you need to refinance or sell before the fixed term ends. Variable rates offer more flexibility and typically include features like offset accounts and unlimited extra repayments.

An offset account linked to your investment loan can reduce the interest you pay by offsetting the balance in the account against your loan balance. If you have surplus cash or irregular income, an offset account can be more tax effective than paying down the loan directly, because the loan balance remains higher and generates more deductible interest.

If you already own property or have other loans, a loan health check before applying for off-the-plan finance can identify opportunities to restructure your debt and increase your borrowing capacity. Small changes to your existing loans, such as consolidating debt or switching to a lower rate, can make the difference between conditional approval and a rejection.

Red Sea Lending works with Parramatta investors and medical professionals across a range of lenders and investment loan options to find a structure that suits your situation and the specific property you are purchasing. Call one of our team or book an appointment at a time that works for you.

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