A walk down a boulevard of display homes can fill any potential first homebuyer with ideas and a sense of opportunity. Not only do these homes look so clean and shiny, with so many desirable features, they’re often much more affordable than properties in more established suburbs.
Building companies generally build display homes in outer city suburbs to show off their design concepts and expertise. They are often packed with every feature on the glossy brochure to entice homeowners with a block of land to choose their vision. But the homes themselves are often very attractive to investors and new homebuyers.
Yes, a display home may be a more affordable investment than other types of properties. However, getting finance for a display home isn’t always easy. Most lenders take a conservative approach to financing the purchase of display homes because of the leaseback arrangement that most builders use as part of any sale offers less flexibility for the buyer (and the lender). Some lenders, for instance, don’t accept display homes as security for a loan.
What is a display home?
Many building companies in Australia use display homes to showcase their house design proficiency. They often fill these homes with top-end features to show potential new buyers what they may get if they choose a house “with the lot”. These are often their best, fully customised examples.
Builders may create whole display home villages to present designs and house plans. Other display home villages bring together the creations of multiple builders, all in one convenient location.
Many display homes are bought under a leaseback arrangement. This dictates the terms under which you buy a home and lease it back to the builder while it is being used as a display property. Effectively, you are the investor and the builder is the tenant. At the end of the leaseback agreement, you can choose to make the home your permanent residence or continue as a landlord by finding tenants for the property.
Leaseback arrangements are generally no longer than 24 months but may have terms and conditions specific to that property and display village.
Why don’t lenders approve loans for display homes?
- The rental agreement is significantly more expensive than competitive market rents. It may be difficult to maintain a rent level once the leaseback ends.
- The leaseback agreement favours the builder or is over a long period – lenders may have little control over the property if things go wrong.
- If the builder cancels the lease, finding new tenants can be difficult. This is especially the case if the house is part of a display village and many of the houses are empty.
- Difficulties may arise if the builder defaults on the lease. Even if the lease seems safe, it’s important to consider all possible implications. Ask your solicitor to find out more about this.
Benefits of buying a display home
Builders sell many, if not most, of their display homes. This is not surprising, considering a display home has several benefits:
- They often look better than older homes on the market. Since nobody actually lives in a “display” home, it tends to look better than many of the properties on the market. Also, builders usually put effort into making sure their display properties look good enough to sell.
- They include high-end materials. Many builders create display homes to highlight top features and amenities. They use high-quality materials and features that are sometimes not seen in other newly built homes.
- They might come with a built-in discount. Display homes often sell for less than their market value. Most of the time, builders want to sell them fast, so they can invest their money in other projects.
- You get to buy a new home sooner. Investing in a ready-made display home is faster than building a similar home on a vacant plot of land. It can also be less stressful because you can see what you’re buying.
Drawbacks of buying a display home
- You can’t choose the location of your display home. If you want to buy it, you may have to live in a display village. While you might be living in a good area, some or most of the properties around you could be vacant for some time.
- The display home may have been used for several years already. Even if nobody has slept in it, it may still show signs of wear.
- The home may not be built to an ideal standard or lacks certain features that you might think are essential. This can happen when builders rush to finish the homes in their display villages.
Display home loan approval factors
The lending approval criteria for display homes can be extensive. However, most of deciding factors are related to the leaseback agreement where the builder is the tenant. Here are the key approval factors:
- Leaseback to the builder: Some lenders won’t finance a display home until the leaseback has ended and the property is available to new tenants.
- Two-year lease: To get 75% to 80% of the property value through a loan to value ratio (LVR) loan, the leaseback term should not exceed 24 months.
- Rental income: You can only get 90% LVR home loans if you don’t need the property rental income to afford the loan. Also, to qualify for this, the lease should expire within six months.
- Bank guarantee from builder: This is often required for a home loan on a property in a display village. You may be able to secure this type of loan if you don’t need to rely on rental income.
How much can I borrow for a display home loan?
The amount you can borrow depends not only on your lender but your credit history. The value and location of the property matters, too.
The most important consideration is the leaseback agreement you may be forced to enter with the builder. This gives the builder the right to continue to show the home for a guaranteed rental return. The usual period is less than two years.
The more restrictive the leaseback arrangement is, the more difficult it could be to find a lender. This might limit the number of home loan options you have available. Indeed, many major lenders aren’t willing to lend money for display homes that have a leaseback arrangement.
Likewise, lenders don’t offer low doc loans for display homes because of the number of factors that come into the deal. Many would see any arrangement involving a leaseback as high risk.
An alternative may be to get a guarantor loan. This is where a guarantor offers their own property (or properties) as security for the loan. This guarantor, who is usually an immediate family member, may also contribute additional income to help you pay off the loan. It may also avoid the need to pay Lenders Mortgage Insurance (LMI). You can read more about guarantor loans here.
What to do next
uno home loan advisers can help you finance a display home. Whether you’re a first homebuyer or investor, we can provide home loan comparisons and more:
Use our loan calculator to learn how much you need to borrow
Compare home loans to find the most suitable one for you
Talk to an expert about display home loans to better understand all your options.
This information is general in nature and you should always seek professional advice when making financial decisions.