Top tips to fund an off-the-plan investment in Kogarah

Financing an off-the-plan investment property in Kogarah works differently to buying an established apartment or house.

You're committing to a property that doesn't exist yet, which means the lender assesses your borrowing capacity twice: once when you exchange contracts and again at settlement, which might be 18 to 24 months later. Your income, expenses, deposit and the property's value can all shift in that time. For medical professionals and other Kogarah buyers looking to build wealth through property, understanding how lenders treat off-the-plan purchases matters because it changes how you structure the application and how much you'll need in savings by settlement.

How lenders assess off-the-plan purchases differently

Lenders approve your investment loan based on the property's expected value at completion, not the purchase price you've locked in. They'll typically lend against 80 per cent of the lower of the contract price or the valuation at settlement. If the valuation comes in below the purchase price, you'll need to make up the difference in cash or accept a higher loan to value ratio with Lenders Mortgage Insurance added.

Consider a buyer purchasing a two-bedroom unit in a new development near Kogarah station. Contract price is within the suburb's established apartment range, deposit is 10 per cent, and pre-approval is granted. At settlement 20 months later, the valuation matches the contract price, but the buyer's credit card limit has increased and a new car loan has been added. The lender recalculates serviceability and the loan amount drops by $35,000. The buyer either brings more cash to settlement, sells the car to clear the loan, or loses the deposit and walks away.

What happens between contract and settlement

Your financial position will be reassessed at settlement, and any deterioration in your borrowing capacity can affect the final loan approval. Lenders apply a serviceability buffer of at least 3.0 percentage points above the loan product rate, and if you've taken on new debt, changed jobs, reduced your hours or increased your living expenses, the loan amount approved at pre-approval might not be available at settlement.

Debt-to-income limits also apply from February this year. Lenders can only write 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or more. If your income hasn't increased but your borrowing has, you may be caught by the cap even if you were pre-approved before the limit came in.

Interest only repayments and cash flow in the first few years

Most buyers financing off-the-plan investment properties in Kogarah choose interest only repayments for the first few years to reduce holding costs while the property establishes a rental history. Interest only means you're only paying the interest charge each month, not reducing the loan balance. The monthly repayment is lower, which helps if you're negatively geared and relying on salary income to cover the shortfall between rent and expenses.

Interest only periods are usually offered for up to five years on standard investment loans, after which the loan reverts to principal and interest and the repayment increases. If your loan to value ratio is above 80 per cent and the interest only period is longer than five years, the loan may be classified as non-standard under the prudential framework, which can affect pricing and availability.

How the new negative gearing rules affect off-the-plan buyers

If you exchange contracts on an off-the-plan investment property in Kogarah after 12 May this year and it's not classified as an eligible new build, losses from that property can only be offset against income from other residential investment properties from the 2027-28 income year onward. You can't deduct the loss against your salary or other income. Losses you can't use in a given year are carried forward and can be used against residential property income in future years.

Eligible new builds are exempt. An eligible new build is a dwelling constructed on previously vacant land, or a development where the number of dwellings increases compared to what was there before. A knock-down rebuild that replaces one house with one house is not an eligible new build. If the development you're buying into qualifies, you can continue to deduct losses against your salary under the existing rules.

In our experience, most off-the-plan apartment developments in Kogarah that replace older low-rise buildings or industrial sites with higher-density residential buildings will qualify as eligible new builds because the number of dwellings increases. You should confirm this with your conveyancer and accountant before exchanging contracts, because it materially affects the after-tax return, particularly in the first few years when holding costs often exceed rental income.

Valuation risk and sunset clauses

Off-the-plan contracts include a sunset clause, which is the date by which the developer must complete the project or the buyer can withdraw without penalty. Sunset clauses in current Kogarah developments typically sit between 24 and 36 months from the contract date. If the development is delayed and the sunset date passes, you can walk away and recover your deposit. Developers can also use the sunset clause to rescind the contract if property values have risen significantly and they want to re-sell at a higher price, although recent case law has tightened the circumstances in which this is allowed.

Valuation risk works the other way. If the market softens between contract and settlement, the property may be valued below the contract price. Lenders will only lend against the lower figure. You'll need to bring the difference in cash or pay for Lenders Mortgage Insurance if the lender agrees to proceed at a higher loan to value ratio. Valuation risk is higher in areas with multiple new developments completing around the same time, because supply can temporarily exceed demand and depress comparable sales.

Deposit structures and the 10 per cent at exchange rule

Most off-the-plan contracts require a 10 per cent deposit, typically paid in stages: 5 per cent on exchange, then the remaining 5 per cent within a set period, often 90 days. The deposit is held in a trust account until settlement. If you withdraw from the contract outside the cooling-off period and without relying on a sunset clause or financing condition, you'll generally lose the deposit.

You can't borrow the deposit for an investment loan. Lenders require genuine savings or equity from another property you own. Genuine savings means funds held in your name for at least three months. Gifts from family may be accepted but the lender will require a statutory declaration confirming the funds are not repayable. For medical professionals in Kogarah, especially those on higher incomes, accumulating a 10 per cent deposit plus settlement costs is usually achievable within 12 months of starting full-time work, but it requires deliberate cash flow management if you're also servicing student debt or a car loan.

Capital gains tax treatment from July next year

From 1 July 2027, the capital gains tax discount changes for investment properties that aren't eligible new builds. Instead of the 50 per cent discount on gains, you'll index the cost base for inflation and pay tax on the real gain only, with a 30 per cent minimum tax rate applying to the indexed gain. For eligible new builds, you can choose between the old 50 per cent discount and the new indexation method when you sell.

If you buy an off-the-plan property in Kogarah this year and settle early next year, the portion of any gain that accrues before 1 July 2027 is taxed under the current rules, and the portion that accrues after that date is taxed under the new rules. You can either obtain a market valuation as at 1 July 2027 or use an apportionment formula the ATO will publish. For properties held long-term, indexation may produce a lower tax outcome than the 50 per cent discount if inflation remains elevated, but the 30 per cent minimum rate means high-income earners won't benefit as much from the change.

Stamp duty and other upfront costs in New South Wales

Stamp duty in New South Wales is charged on the dutiable value of the property, which is the higher of the purchase price or the market value. For investment properties, no stamp duty concessions apply. Off-the-plan purchases do not attract a discount on stamp duty in New South Wales, unlike in some other states. If your contract price sits within the median range for new apartments in Kogarah, expect stamp duty to add several thousand dollars to your upfront costs, payable within three months of exchange.

Other upfront costs include legal fees for the conveyancer, building and pest inspection if the contract allows it, loan application fees, and Lenders Mortgage Insurance if your deposit is below 20 per cent. LMI on investment properties is more expensive than on owner-occupied loans and is calculated on a sliding scale based on the loan amount and loan to value ratio. The premium is usually added to the loan balance rather than paid upfront, but this increases the amount you're borrowing and the interest you'll pay over time.

Red Sea Lending works with medical professionals and Kogarah residents who want to build wealth through property but need a finance structure that accounts for how off-the-plan lending actually works. Call one of our team or book an appointment at a time that works for you.

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