The Risks of a Low Sinking Fund
One of the first questions buyers ask when purchasing a unit in a strata titled community is:
“How much is in the sinking fund?”
It’s a fair question—but focusing only on the balance can be misleading. The more important question is:
“How much should be in the sinking fund?”
Understanding this difference can help both current owners and prospective buyers avoid unexpected costs and long-term issues.
What Is a Sinking Fund and Why Does It Matter?
In both Queensland (where a strata-titled scheme is known as a body corporate) and New South Wales (where a strata-titled scheme is known as an owners corporation), the sinking fund (known as a capital works fund in NSW) is designed to cover long term maintenance and major repairs.
Think of it as a shared savings pool. Every owner; past and present, contributes a small amount over time to fund future works such as:
- Exterior painting
- Roof repairs or replacement
- Lift upgrades
- Driveway resurfacing
- Structural repairs
Its purpose: to spread the cost of major expenses fairly across generations of owners, rather than burdening whoever happens to own the property when the work becomes necessary.
How a Healthy Sinking Fund Should Work
A well-managed fund typically follows a long-term plan (often a 10-year forecast or more). Contributions (levies) are set at a level that:
- Gradually builds the fund over time
- Keeps pace with anticipated maintenance costs
- Avoids sudden spikes in levies
Ideally, levies increase slowly and predictably, allowing owners to budget with confidence while ensuring funds are available when needed.
Where Things Go Wrong
Problems arise when levies are set too low or when long-term planning is ignored. This can happen for a few reasons:
-
Owners vote to keep levies unrealistically low
-
No up-to-date sinking fund / capital works forecast is in place
- Necessary maintenance is delayed to avoid spending
- Committees underestimate future costs
While this might feel like a short-term saving, it often leads to bigger problems down the track.
The Risks of a Low Sinking Fund
1. Special Levies
If the fund doesn’t have enough money when major works are required, owners may face large, unexpected special levies. These can run into thousands, or even tens of thousands of dollars per lot – often with little notice.
2. Deferred Maintenance
When funds are tight, essential works may be postponed. Over time, this can lead to:
- Deterioration of the building
- Higher repair costs later
- Safety concerns
Delaying maintenance rarely saves money – in fact, it usually increases the eventual cost.
3. Reduced Property Value
Buyers should look beyond the current sinking fund balance and assess whether the fund is adequate.
A poorly funded sinking fund can:
- Deter potential buyers
- Reduce sale prices
- Raise red flags during due diligence
4. Unfair Cost Burden
A low sinking fund shifts the financial burden onto current or future owners, rather than sharing it fairly over time. In effect, earlier owners benefit from lower levies, while later owners pay more for the same assets.
What Owners and Buyers Should Look For
Instead of focusing only on the current balance, consider:
- Is there a current sinking fund (or capital works) forecast?
- Are contributions aligned with that plan?
- Are major expenses coming up soon?
- Has maintenance been deferred?
A “low” balance isn’t always a problem – if there’s a solid plan in place to build it up. Likewise, a “high” balance isn’t always reassuring if future costs haven’t been properly accounted for.
Final Thoughts
A healthy sinking fund is one of the strongest indicators of a well-managed building.
For owners, it means fewer surprises and better long-term outcomes.
For buyers, it provides confidence that the property is being properly maintained.
Low levies might look attractive at first; but they often come with hidden risks. In strata living, steady planning and consistent contributions almost always win in the long run.
Would you like to learn more about sinking funds and effective strata budgeting? Contact us – we’re happy to help you: www.tcmstrata.com