How to get a loan to buy a display home
It’s easy to fall in love with display homes. They’re new, they’re attractive and you can take possession now, without having to wait for a lengthy building period.
Display homes can also make strong investments, for several reasons:
- They often deliver yields of between 6-8%, which makes them positive-cashflow investment in this low-rate environment
- They’re often located in growth corridors, with rising populations
- At the end of the leaseback period (which can be up to four years), investors may have already built up quite a bit of equity
Sometimes, though, if borrowers try to organise a loan on their own, they might experience problems, because of the technical differences between display homes and regular homes.
Before we explain those differences, we’ve got some good news – you shouldn’t have any problem getting finance if you work with an experienced broker, like Mortgage Domayne.
Why lenders treat display homes differently to regular homes
The reason lenders treat display homes differently to regular homes is because the sale price of display homes is sometimes higher than their market value.
Why? For two main reasons.
First, builders will often insist on a ‘leaseback arrangement’. This means they get to lease back the display home while the development project is taking place, so they can use the display home to market the off-the-plan properties they’re building. Builders often pay above-market rents during the leaseback period. On the one hand, that means the buyer pockets more money. But on the other hand, some valuers may treat that overpayment as a rebate, and reduce the value of the property accordingly.
Second, although display homes are residential properties, they’re often sold with a fixed commercial lease (i.e. for the builder) in place. That can restrict the lender’s ability to provide a residential loan.
What are some of the different rules that apply to display home loans?
Most lenders in the display home space have a maximum loan-to-value ratio (LVR) of 80%, although some will go up to 90%. The leaseback term could be a factor as to whether or not the lender will consider this type of security. An experienced broker will make sure their client has a deposit that matches the lender’s criteria.
Lenders tend to impose a limit on the leaseback period. Often, this will be two years – although some lenders will allow an option for eight three-month extensions, potentially allowing the builder to extend the leaseback from two to four years. An experienced broker will place their client with a lender that is likely to accept their particular sale contract.
As a result of these technical differences between display homes and regular homes, some lenders don’t offer loans for display homes.
But Mortgage Domayne has relationships with a range of lenders that do, and can help you get finance for a display home, even if it comes with a commercial lease attached.
Also, Mortgage Domayne has access to lenders who permit upfront valuations – i.e. before the loan application gets submitted. That gives buyers greater certainty when they apply for finance. Without an upfront valuation, the lender might initially give pre-approval, but then decline to give final approval once they discover the property is a display home.
How can you increase your chances of qualifying for a display home loan?
If you decide to apply for a display home loan on your own, it’s important you understand the lending policy of your preferred lender, because a failed application could damage your credit score.
Of course, the easiest way to apply for finance is through an experienced broker, like Mortgage Domayne, which has a strong track record with display home loans.
Here are five other things you can do to increase your chances of approval:
- Maintain a full-time job with a regular salary
- Reduce your discretionary spending
- Increase your savings rate
- Pay down loans (e.g. credit card, car loan, personal loan)
- Pay your bills on time
Mortgage Domayne has a lot of experience with display home loans. If you need finance to buy a display home, call Mortgage Domayne on 1300 366 296 or book an appointment.