Common Mistakes When Financing an Off-the-Plan Investment

Off-the-plan investment property means committing to buy an apartment before construction has finished, often years before you take ownership. The deposit is paid now, the loan settles when the building is complete, and in the meantime your lending capacity, the property's value, and the tax landscape can all move under you.

Eligible new builds including off-the-plan apartments are fully exempt from the negative gearing abolition that applies to established properties purchased after 12 May 2026. That makes them the only property type where rental losses can still be fully offset against salary income for working professionals and self-employed buyers in Bondi Junction, but the lending structure is more complicated than most investors realise when they sign at the display suite.

Finance Approval Does Not Mean Finance at Settlement

You need pre-approval before you exchange contracts, but the loan is not drawn until the building is complete and title issues. Settlement usually takes place around 18 to 36 months after exchange. Most lenders issue conditional approval for a maximum of 90 to 120 days. That approval lapses long before the apartment is built.

Consider a self-employed investor who signs for a two-bedroom off-the-plan unit in Bondi Junction. They secure unconditional approval in October with a serviceability buffer calculated at 3.0 percentage points above the product rate, income declared from their last two tax returns, and a deposit held via bank guarantee. By the time the building reaches practical completion 24 months later, their most recent year's income may have changed, DTI lending limits activated in February 2026 may reduce how much they can borrow, and the lender reassesses serviceability from scratch using the current buffer and their updated financials. The loan must be reapproved as if it were a new application.

Investors should maintain up-to-date tax returns, avoid taking on additional debt during the construction period, and engage the broker six months before the expected settlement notice. If income has dropped or the DTI ratio has worsened, the lender may reduce the loan amount or decline altogether, forcing the buyer to find another lender, increase the deposit, or forfeit the contract.

Valuation Risk at Settlement Is the Largest Financial Trap

The biggest risk in off-the-plan property in Australia is a valuation shortfall at settlement, with the lender commissioning their own valuation when the property is ready to settle. You agreed to a purchase price two years earlier. If the lender's valuer assesses the completed property below that contract price, the loan amount is calculated on the lower figure, and you are required to cover the shortfall in cash at settlement.

In a scenario where a buyer contracts to purchase an off-the-plan apartment in a Bondi development for $1,150,000 with a 10 per cent deposit and 80 per cent LVR loan, the bank agrees to lend $920,000. Two years later, at settlement, the lender's valuer assesses the completed apartment at $1,050,000. The bank will now lend only 80 per cent of $1,050,000, which is $840,000. The buyer must find an additional $80,000 in cash on top of their original deposit, or the settlement will fail. The bank will conduct a final valuation 30 to 60 days before settlement, and if the value has dropped, the buyer must pay the gap from their own funds.

This is not hypothetical. Markets move, construction quality varies, and oversupply in certain precincts can depress valuations below the original off-the-plan pricing. Buyers in Bondi Junction should assess the suburb's supply pipeline and comparable completed stock before committing, particularly where multiple developments are settling in the same quarter.

Interest-Only Loans and the Construction Period Cash Flow Gap

Most investment loans are structured on an interest-only basis to maximise cash flow and tax deductions. During the construction period, you are not making any loan repayments because the loan has not settled. You are also not receiving any rental income because the property does not exist. That means you carry the holding cost of the deposit without offset, and you need to maintain your savings buffer for the full construction period without the passive income most investors rely on to service the loan once it settles.

A Bondi Junction investor purchasing off-the-plan with a two-year construction timeline who has structured their budget around rental income from settlement will have zero income for 24 months while continuing to service any existing debt and meet living expenses. If they were relying on equity release from another property to fund the deposit and that equity position has tightened due to a revaluation, the entire structure can collapse before the apartment is even built.

Sunset Clauses and the Risk of Developer Rescission

All off-the-plan contracts include sunset clauses allowing the developer to cancel if the project is not completed by a set date, typically 24 to 36 months. In NSW and Victoria, legislation now requires the developer to obtain buyer consent or Supreme Court approval before triggering a sunset clause, preventing developers from deliberately delaying to re-sell at higher prices.

Even with these protections, a sunset clause can still result in the contract ending. If the developer cannot complete on time due to genuine delays, or if they obtain consent to rescind, the buyer's deposit is refunded but they have tied up capital for years without acquiring the asset. Finance approval has lapsed, their circumstances may have changed, and they are back at the start. Contracts will often provide the vendor the right to extend the sunset date where there have been delays beyond the control of the vendor, and such clauses need to be carefully reviewed to ensure there are appropriate limits to the number and length of such extensions, otherwise the purchaser may find themselves bound to a contract for substantially longer than first anticipated.

Before signing, have a solicitor review the sunset clause wording, the developer's track record on previous projects, and whether any extension rights are capped. A sunset clause that allows unlimited developer extensions with no buyer consent removes most of the certainty an investor needs to plan the rest of their portfolio.

Deposit Bonds and the Cash Flow Trade-Off

Deposits on off-the-plan contracts are generally paid at the time contracts are exchanged, and many contracts allow the deposit to be paid via a deposit bond or bank guarantee instead of cash, which can help buyers avoid tying up funds for the full construction period. A deposit bond is an insurance product that guarantees the deposit to the developer without the buyer paying the cash upfront. The buyer pays an annual premium instead, typically around 1.2 to 1.5 per cent of the deposit amount per year.

For a 10 per cent deposit on a $1,100,000 Bondi Junction apartment, that is $110,000. Using a deposit bond avoids paying $110,000 in cash, but costs roughly $1,320 to $1,650 per year in premiums. Over a two-year construction period, that is $2,640 to $3,300. The trade-off makes sense if the buyer can earn a return on the $110,000 elsewhere or needs to preserve cash for other deposits, but it is an additional cost that reduces the overall return on the investment and must be factored into the feasibility calculation.

Body Corporate and Defect Liability in New Developments

Off-the-plan investors take on defect risk and unknown body corporate costs that established property buyers can see in advance. The body corporate budget provided at the point of sale is an estimate. Actual levies can be higher, particularly in the first few years if the building requires remedial work, if the developer has underestimated operating costs, or if a special levy is imposed for common property defects.

In recent years, defect rates in new apartments have been widely reported. Investors should budget conservatively for body corporate levies, hold a contingency for special levies, and engage a building inspector at the pre-settlement inspection to identify defects before taking possession. Once settlement occurs, rectifying defects becomes the owner's responsibility to pursue through the developer's warranty or the building's defect liability period, which can be time-consuming and costly.

Tax Deductions and Depreciation on New Builds

Off-the-plan apartments qualify for significantly higher depreciation deductions than established property. Plant and equipment such as ovens, air conditioning, and flooring can be depreciated at accelerated rates, and the building structure itself qualifies for capital works deductions over 40 years. For self-employed and salaried investors in Bondi Junction, those deductions reduce taxable income and improve after-tax cash flow.

A quantity surveyor prepares a depreciation schedule after settlement, and the deductions are claimed as part of the investor's annual tax return. Combined with the continued ability to negatively gear off-the-plan purchases against all income, the tax position on a new build investment remains more attractive than an established property purchased after 12 May 2026, provided the investor can carry the holding costs through to settlement and the valuation holds.

Call one of our team or book an appointment at a time that works for you. We work with investors across Double Bay, Bondi Junction, and the Eastern Suburbs to structure investment property finance that accounts for construction timelines, valuation risk, and settlement cash flow, and we keep your approval current through to the day title issues.

Frequently Asked Questions