Buying Off the Plans: Sunset Clauses and Finance Risk

The structural problem with off-the-plans finance

When you buy an existing house, you arrange finance and settle within weeks. When you buy off the plans, you sign a contract now and settle when the building is finished — which might be eighteen months or three years away.

No lender will give you a binding, unconditional approval that far ahead, because it cannot know what your income, the lending rules or the property's value will be at completion. You can usually get an indication, and some lenders will look at it closer to completion, but the gap between signing and settling is a risk you carry.

Valuation shortfall: the main financial risk

Lenders lend against the lower of the purchase price or the valuation at the time of settlement. If the market has softened between signing and completion, the valuation can come in below the price you contracted to pay.

You are still contractually obliged to pay the agreed price. The lender will only lend against the lower figure. The difference is a shortfall you must cover in cash, on top of your planned deposit.

A worked illustration of the mechanism — using round numbers, not a prediction:

• You contract to buy at $800,000 with a planned 20% deposit of $160,000, expecting a $640,000 loan.
• At completion the property values at $750,000.
• The lender will lend 80% of $750,000, which is $600,000.
• You still owe $800,000 under the contract, so you now need $200,000 rather than $160,000 — an extra $40,000 in cash.

This is the single most common way off-the-plans purchases go wrong, and it has nothing to do with the buyer's conduct.

Sunset clauses work in two directions

A sunset clause sets a date by which the development must be completed. If it is not, the contract can be cancelled. Buyers often assume this protects them — and it does, partly, by giving an exit if the project stalls indefinitely.

But the clause may also allow the developer to cancel. In a rising market, a developer who can cancel and resell at today's higher prices has an incentive to do so. Your deposit comes back, but the gain you expected goes to someone else, and you are back in a more expensive market.

What to have your lawyer check:

1. Who can cancel under the sunset clause — you, the developer, or both.
2. The sunset date, and how it can be extended, and by whom.
3. What happens to your deposit and whether any interest accrues.
4. Whether the developer can vary the plans, specifications or unit size, and within what tolerance.
5. Whether your deposit is held in a solicitor's trust account, and what security you have for it.

The new build advantages are real

None of this means off the plans is a bad idea. There are genuine benefits worth weighing:

• Loan-to-value treatment. New builds have historically been treated more favourably under Reserve Bank LVR restrictions than existing properties, which can mean a smaller deposit. The settings change over time, so confirm the current position rather than relying on what applied last year.
• A long run to save. The period between signing and settlement is time to build your deposit, which can offset some of the valuation risk.
• A new home. Builder's warranties, current building standards, Healthy Homes compliance from the outset, and generally lower maintenance.
• Price certainty on the build. You have locked a price, which in a rising market works in your favour.

How to reduce the risk

1. Keep saving the whole way through. A larger deposit at settlement is the most direct protection against a valuation shortfall.
2. Have your lawyer review the contract before you pay anything. Off-the-plans contracts are developer-drafted and vary enormously.
3. Check the developer's track record. Completed projects, time taken, and whether buyers settled without issue.
4. Get an indicative lending position now and reconfirm as completion approaches. Not binding, but it tells you whether you are in range.
5. Understand the title. Many off-the-plans purchases are unit titles with body corporate obligations — see our guide to NZ title types.
6. Confirm the CCC position. Settlement normally requires code compliance certification, and delays there delay your settlement.

How we approach these

We set expectations honestly at the start and stay with the file through to completion. That means giving you a realistic view of where you would stand at settlement under a weaker market, flagging what in the contract creates finance risk, and reconnecting as completion approaches to get the actual approval in place.

Send us the contract and the expected completion date. We will tell you what the finance path looks like and what to keep saving.

Progressive payment versus single settlement

Off-the-plans contracts are structured in one of two broad ways, and which you are signing changes your finance requirement completely.

• Single settlement on completion. You pay a deposit on signing — commonly held in a trust account — and the balance in one payment when the build is complete and title issues. Your mortgage draws down once, at the end. This is the typical structure for apartments and completed townhouses.
• Progressive payments during construction. You pay in stages as the build progresses. This is more common where you own the land and are contracting a build, and it requires a construction loan with staged drawdowns rather than a standard mortgage.

The distinction matters because a construction facility is assessed differently — against a fixed-price build contract, with the lender inspecting and releasing funds at each stage. Our construction loan page sets out how that works. If you are not sure which structure your contract uses, ask your lawyer before signing.

Title, CCC and what has to exist before you can settle

Settlement on an off-the-plans purchase depends on things that have nothing to do with your finance being ready. Typically all of the following must be in place:

1. A separate title issued for your unit or lot. On a subdivision this requires survey, council sign-off and LINZ registration, and it can lag the physical completion of the building.
2. Code compliance certificate confirming the building work complies with its consent.
3. For a unit title, the body corporate established and the unit plan deposited.
4. Your lender's final approval, based on a valuation of the completed property.

Delays in any of these delay your settlement, and the contract will specify what happens then — including whether interest or penalties accrue. Have your lawyer explain the settlement mechanics and what happens if title is late, because it is common.

A pre-purchase due diligence list

Before you pay a deposit on an off-the-plans purchase, work through the following with your lawyer and your broker:

The last line is the one to be most honest with yourself about. Everything else is manageable; a valuation shortfall you cannot cover is the scenario that forces a distressed outcome.

This article explains how New Zealand lenders generally assess these situations. It is general information, not personalised financial advice, and lender policy changes often — check your own position with a registered adviser. Official sources: Reserve Bank of New Zealand for lending policy and the OCR, and Sorted.org.nz for independent government-backed money guidance.