Conditions have changed since purchase, adviser says
A financial adviser is concerned that homebuyers who purchased properties off the plan a couple of years ago and are now required to settle are being caught out by changing market conditions.
Heather Roney (pictured above left), director and financial adviser at Mortgage Ladies and Co, told NZ Adviser that a combination of building delays, higher stress test rates and a drop in property values had created the perfect storm for several of her clients.
Some first home buyers who purchased properties off the plan in 2021 and 2022 now struggle to meet bank servicing criteria and are unable to get finance, she said.
“Clients are no longer meeting servicing criteria, they can’t get their finance, so they’re losing their deposits,” Roney said.
Mortgage stress test rates have increased
At the end of 2021, Roney said that the stress test rate (the rate at which banks test a borrower’s ability to repay a loan) was 5.8%. Currently, most banks are testing at around 9%, she said.
“Some of these builds are taking over two years to complete – the bank criteria has moved significantly since then.”
New home construction costs increased sharply over the 2021 and 2022 period, Statistics NZ figures showing year-on-year increases of 18.3% in the first and second quarters of 2022).
Property values drop since 2022 peak
According to CoreLogic NZ November 2023 figures, from the peak (March 2022) to September 2023’s trough, property values fell 13.2%. Following increases in October and November, the national average property value ($915,448) remained 12.3% down.
Roney said that many first home buyers had paid a 10% deposit and since found that the value of the property they purchased had dropped.
“We’re talking tens of thousands of dollars difference between what they purchased at and the value now,” Roney said.
She said when purchasing off the plan, purchasers would typically go through the process of a conditional offer, which would have been subject to finance at that time. Banks typically provided 90-day rolling approvals, requiring property purchasers to get the approval updated. A deposit is paid when the contract is deemed unconditional.
Roney said that among the solutions she discussed with clients struggling to get finance was to borrow money off family and friends to bridge the difference or talk to their employer about increasing their salary. However, some purchasers have been forced to “walk away”.
“I have one client who I inherited recently who is $66,000 short...we’ve just scraped through on servicing where the client was able to ask their employer for a pay increase,” Roney said.
“I also know of one family who have walked away because there was no way they could get the finance.”
Shortages have caused delays for off-the-plan properties, lawyer says
Kate Chivers (pictured above right), principal lawyer at Turner Hopkins acknowledged that while she knew of a couple of purchasers in this situation, these circumstances were not prevalent.
Property developers have been hit with labour shortages and material shortages, resulting in delays and a slowdown in Titles, CCCs and LIMs being issued. Getting the finished product across the line has been “problematic”, she said.
“Then you’ve got the decrease in property value, the increase in mortgage rates, and the fact that some of our first home buyers have paid a deposit, their finance has fallen over and they’re in a predicament where they can’t settle and they will lose a 10% deposit,” Chivers said.
Each contract has a set of terms and conditions for both purchasers and vendors, and purchaser finance conditions will have been satisfied well before the settlement date, she said. Once the vendor satisfies their conditions, (e.g. to obtain Title and CCC) the agreement is fully unconditional, with settlement usually within 10 working days.
Chivers explained that where a purchaser is unable to settle, the terms and conditions of most agreements specify that the deposit is forfeit and given to the developer or vendor. She noted that vendors can exercise other rights in cases where purchasers don’t settle.
“Most purchasers, having had good legal advice, would have been alerted to that all along that if there is a problem later on with establishing finance, they will forfeit that 10%,” she said.
Purchasers advised to talk to the developer first
Chivers said that her initial advice to a purchaser unable to settle due to an inability to get finance is to “talk to the developer”.
From her dealings with developers, Chivers said that most “will budge if they can”, as they are relying on the sale to repay their debt.
Heading into a more active property market, Chivers said that developers has the option to hold the purchaser to the contract but also to relist the property for sale.
Alternatively, the purchaser can market the property themselves and should a buyer be found, arrange the property purchase and sale to occur on the same day (referred to as a “contemporaneous settlement”).
Another approach is to work with a mortgage adviser to find a lender who will provide finance, or discuss finance options with family, she said.
If she had the opportunity to talk to purchasers of off-plan properties in 2020 to 2022, Chivers said that she would have encouraged them to maintain their relationship with their mortgage adviser or lender and keep them updated on any changes.
“It’s better to find out 12 months out to a settlement that you can’t settle than it is 10 days before the settlement,” Chivers said.
Do you have clients finding it difficult to get finance on off-plan properties purchased in 2021? How are you assisting them? Share your thoughts in the comments section below.
