Do you know how off-the-plan investment loans work?

How off-the-plan investment loans differ from standard property finance

Off-the-plan investment loans are structured around a delayed settlement model where contract and completion may be separated by one to three years. Lenders assess your borrowing capacity at the contract date but reassess serviceability, policy, and the property's value again at settlement.

Consider a buyer who contracts to purchase a one-bedroom apartment in a development near Glenferrie Road in Hawthorn, with an expected completion date 18 months away. At the time of contract, they secure pre-approval with a debt-to-income ratio of 5.8 and a variable rate product. By the time settlement approaches, the lender has activated a DTI limit of six times, and the buyer's income has not changed, but their credit card limit has increased. The lender reassesses and requires a further cash injection to meet the new serviceability threshold. The buyer had budgeted for a 10 per cent deposit at settlement but now needs to find an additional amount to proceed.

This gap between approval and settlement is where most off-the-plan purchases encounter funding issues. Lenders do not guarantee loan terms will remain available. Policy, rates, and valuation methodology can all shift during the construction period, and buyers remain contractually obligated to settle regardless of those changes.

What happens if the property value falls between contract and settlement

Lenders conduct a valuation at settlement based on the completed property, not the contract price. If the completed apartment is valued below the contract price, the lender calculates the loan amount and loan-to-value ratio using the lower figure.

In a scenario where the contract price is set at a figure that reflects a developer's preconstruction pricing, but the completed valuation comes in 8 per cent lower, the buyer who arranged finance at 80 per cent LVR now faces a shortfall. The lender will lend 80 per cent of the valuation figure, not the contract price. The buyer must make up the difference in cash or seek Lenders Mortgage Insurance to cover a higher LVR, which adds cost and requires a reassessment of serviceability. In some cases, lenders will not approve LMI for off-the-plan purchases above a certain LVR threshold, particularly in postcodes with high unit supply.

Hawthorn's apartment market has experienced cycles of strong demand followed by periods of oversupply, particularly in precincts close to Swinburne University. Buyers relying on developer estimates of future value should obtain independent advice and understand that a valuation at settlement is the lender's measure, not the contract figure.

Structuring deposit funding and timing for off-the-plan contracts

Most off-the-plan contracts require a 10 per cent deposit, often paid in stages: an initial payment on exchange and the balance within a set period, commonly 30 to 90 days. Lenders do not fund the deposit. Buyers must have genuine savings, equity in another property, or gifted funds that meet the lender's source-of-funds requirements.

If you plan to use equity from an existing property to fund the deposit, the lender assesses your total borrowing position, including the amount released from equity and the new investment loan for the off-the-plan purchase. Releasing equity before the off-the-plan property settles means you are servicing that additional debt for the entire construction period without rental income from the new asset. Interest on the equity release can generally be claimed as a deduction where the funds are used to acquire an income-producing asset, but cash flow must be managed across the construction phase.

Some buyers establish an interest-only facility on the equity release and do not draw down the full off-the-plan loan until settlement, reducing holding costs during construction. Your broker should model both the immediate impact of releasing equity and the combined serviceability test that applies when the off-the-plan loan settles.

Interest-only repayment structures for property investors

Interest-only investment loans reduce cash outflow during the period when you are building equity or managing multiple properties. Investors typically select interest-only terms to align repayments with rental income and maximise tax deductions, as principal repayments are not deductible.

For off-the-plan purchases, an interest-only period of five years is common. You pay interest only from settlement, and the loan reverts to principal and interest repayments at the end of that term unless you refinance or request an extension. Lenders apply stricter serviceability criteria to interest-only loans compared to principal-and-interest products, particularly where the LVR exceeds 80 per cent. Under APS 112, interest-only residential loans attract higher risk weights, which flow through to both capital requirements and, in some cases, pricing.

Investors purchasing off-the-plan should confirm whether their lender permits interest-only structures on new apartment stock and whether any LVR or location-based restrictions apply. Some lenders cap interest-only lending in certain postcodes or building types where vacancy rates or settlement risk is elevated.

How lenders reassess serviceability at settlement

Your borrowing capacity is tested twice: once at pre-approval and again at settlement. Lenders apply a serviceability buffer of at least 3.0 percentage points above the loan product rate, and your income, liabilities, living expenses, and any policy changes must be reassessed.

Changes that commonly affect serviceability between contract and settlement include increases to credit card limits, new personal loans, changes in employment, reductions in rental income from other properties, and the introduction of macroprudential limits such as the DTI cap that took effect from February 2026. If your total debt divided by your gross income exceeds six times, and the lender has already allocated its quarterly quota of high-DTI loans, your application may be declined or require additional equity. This is not a theoretical scenario. Buyers who contracted in early to mid-2025, before the DTI limit was announced, have faced reassessment under the new policy at settlement in 2026 and beyond.

You should treat pre-approval as conditional and avoid taking on additional debt or making significant financial changes during the construction period. Lenders do not honour pre-approval terms if your circumstances or their policy settings have shifted by the time the loan is drawn.

Rental income assessment and vacancy assumptions

Lenders do not accept 100 per cent of projected rental income when calculating your serviceability. Most apply a shading factor, accepting between 70 and 80 per cent of the rental figure you provide. If the property has not yet settled, you must provide a rental appraisal from a licensed property manager, and that appraisal is then shaded by the lender.

For a one-bedroom apartment near Auburn Village in Hawthorn, a rental appraisal might indicate weekly rent at the lower end of the range for that building type. The lender takes 80 per cent of that figure and includes it as income in the serviceability calculation. If the appraisal is optimistic or does not reflect current leasing conditions, the income used in the assessment may overstate what you actually achieve once the property is tenanted. Vacancy is also factored into your holding costs, either explicitly or through the shading.

Buyers should obtain a rental appraisal that reflects current market conditions, not developer projections, and understand that the income assumption used by the lender is lower than the appraised amount. Rental yields on newer apartments in Hawthorn typically sit below those of established stock, and vacancy periods between tenants can extend if supply in the precinct is high.

Tax treatment and deductibility for off-the-plan investment purchases

Interest on an investment loan is deductible from the date the loan is drawn, provided the property is rented or genuinely available for rent. You cannot claim interest or holding costs during the construction period unless you have taken ownership and the property is income-producing. Once settlement occurs and the property is advertised for lease, interest, property management fees, council rates, insurance, and other holding costs become deductible.

For contracts exchanged after 7:30pm AEST on 12 May 2026, the deductibility of losses is affected by recent legislative changes. Off-the-plan purchases that qualify as eligible new builds can continue to offset losses against all income, including salary. Eligible new builds include dwellings constructed on previously vacant land and developments that increase the number of dwellings on a site. A knock-down rebuild that does not increase dwelling numbers is not eligible. If your off-the-plan purchase meets the definition of an eligible new build, losses remain fully deductible. If it does not, losses from the 2027-28 income year onward can only be offset against income from residential properties, including capital gains on residential property, and excess losses are carried forward.

You should confirm with your accountant whether your specific purchase qualifies as an eligible new build under the legislative definition. Developers and sales agents may use the term "new build" in marketing, but the tax treatment depends on the technical criteria set out in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

Lenders Mortgage Insurance and off-the-plan lending

Lenders require LMI on investment loans where the LVR exceeds 80 per cent. The premium is calculated on the loan amount and LVR, and is paid by the borrower, usually capitalised into the loan. For off-the-plan apartment purchases, some lenders apply additional restrictions, capping LVR at 90 per cent or declining LMI altogether in buildings with a high proportion of investor sales or in postcodes identified as oversupplied.

LMI does not protect the borrower. It protects the lender against loss if the borrower defaults and the property is sold for less than the outstanding loan balance. The cost of LMI for an off-the-plan investment purchase can be several thousand dollars and is not refundable if the contract does not proceed. If you are relying on an LVR above 80 per cent, confirm that your lender and their LMI provider will cover your specific development before exchanging contracts. Some LMI providers maintain internal exclusion lists for certain buildings or developers, and that information is not always disclosed during the sales process.

Foreign investment rules and off-the-plan purchases

Foreign persons, including temporary residents, are currently banned from purchasing established dwellings in Australia from 1 April 2025 to 30 June 2029, but can still apply for approval to purchase new dwellings, including off-the-plan apartments. Application fees for new dwelling purchases by foreign investors were increased from 1 April 2025. Approved foreign purchasers are generally required to settle within six months of the dwelling being ready for occupation, and some approvals include construction timeframes.

Temporary residents who hold valid approval at the time of contract but whose visa status changes before settlement may no longer meet the conditions of their FIRB approval, which can affect their ability to settle or their ongoing tax obligations. Foreign owners of residential property who do not occupy or rent the property for at least 183 days in a vacancy year are liable for an annual vacancy fee, and from the 2024-25 vacancy year, that fee was doubled. These obligations are separate from the investment loan and are administered by the ATO, but they affect the total cost of holding the property and should be factored into cash flow projections.

Buyers who are not Australian citizens or permanent residents should confirm their eligibility and obligations with a lawyer who specialises in foreign investment before contracting, particularly where settlement is more than 12 months away and visa status may change.

Managing the settlement process and final loan approval

Settlement on an off-the-plan investment property is typically triggered by a notice of practical completion from the developer, giving you 14 to 21 days to settle. At that point, your lender conducts a final valuation, reassesses your income and liabilities, and issues final loan documents. If the valuation, serviceability, or policy assessment does not align with your pre-approval, you may be required to provide additional funds, reduce the loan amount, or seek an alternative lender.

Switching lenders close to settlement is time-sensitive and may not be possible within the notice period, particularly if the new lender requires further documentation or imposes different policy settings. Buyers should reconfirm their loan position with their broker at least 60 days before the expected completion date, update income and liability information, and ensure that all conditions of pre-approval remain satisfied. If construction is delayed, pre-approval may expire, requiring a full reapplication. If construction is brought forward, you may have limited time to arrange final funding.

Hawthorn's off-the-plan developments, particularly those in mixed-use precincts near Glenferrie Road and Burwood Road, have experienced both delays and early completions depending on the developer and market conditions. Buyers should remain in contact with both the developer and their broker throughout the construction phase and not assume that settlement will occur on the original estimated date.

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