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Buying a house that isn't even built yet is a strange concept, but one that more and more Australians are embracing, as high market prices force them out toward undeveloped pockets of land.
What exactly is a house and land package?
The term is used by developers, to denote a kind of 'package deal' that they offer. Typically, developers would buy a large space of land and subdivide it into residential-sized blocks, before selling each block as part of a bundle that also includes a brand new home. The home may be pre-built and ready to move into, or buyers may have the option to choose from a number of standard and customised designs.
What are the benefits?
There are a multitude of benefits associated with this method, which is why it is so popular among first home buyers, investors and down-sizers alike.
- Firstly, you would benefit from owning a brand new home. No need to worry about renovations, excessive maintenance, or wear and tear from the previous owners. Your place has been built from scratch, and you are its very first occupant.
- Secondly, if you are building off the plan, you can customise your home to suit your individual needs. Want to swap that unnecessary study for an extra bathroom? Can do! Need double wall ovens to cater for your love of baking? Not a problem! Choice is not a luxury you tend to get when buying an existing home, so make the most of it with your off-the-plan purchase! Bear in mind, any modifications and extras will likely come with an additional price tag.
- Thirdly, building a new home means that stamp duty will only be charged on the land value. While buyers of existing homes would need to pay stamp duty on both property and land, off-the-plan buyers need only pay the latter, as the former is yet to be constructed.
What are the downfalls?
While there are many upsides to purchasing house and land packages, this method is certainly not without its own drawbacks.
- If you are choosing this method as an investor, there will be a lengthy period during construction when you will be repaying the land mortgage without any rental income. Before you go ahead with this option, ensure you have a healthy cash flow so that this deficit will not be an issue.
- If there are hundreds of similar properties being established within the local area, oversupply may become an issue. Talk to some real estate agents to get a sense of popularity/demand within the region.
- Upgrades. While it is super handy to have options available to you, small upgrades can lead to big financial trouble. $1000 here, $500 there, and before you know it you've added $20k to your original purchase price. This is easily avoided by keeping a keen eye on the budget, and knowing exactly what you can afford - and aiming for less!
Am I entitled to receive any grants?
One of the key reasons house and land packages are so popular, is because there are several grants offered for those wanting to embark on this route. Grants and eligibility requirements vary from state to state. In Victoria, for example, first home buyers who opt for a house and land package would be eligible for the First Home Owners Grant (FHOG) of $10,000, in addition to subsidised stamp duty. Their existing-home buying counterparts would not be eligible for the former, as it is restricted to new builds. Be sure to contact the applicable State Revenue Office to see what grants you are eligible for.
How should I get finance?
You have many different finance options available to you when buying a house and land package. Arguably the most effective method would be to obtain two separate loans; one for the land, and one for the build - the application can be bundled together to simplify things for you. Finance for the land can be acquired through a standard mortgage, however finance for the build would be slightly different. A construction loan allows you to draw down on the loan throughout different stages of the build. For example, you might borrow $20,000 when you slab is poured, and in a month's time, draw down $50,000 for your frame work. This method means that you are only paying interest on the funds you require at the time, and the consequential savings can be huge. To find out more about the finance options available to you, be sure to contact your local broker and they can talk you through the pro's and con's of each method.
Disclaimer: The advice provided in this article is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. We encourage you to consult a finance professional before acting on any advice provided in this article or on this website.