If you’re looking at buying land to build a home, chances are you’ll need help financing that.
- What is a land loan?
- What does a lender consider?
- Pros & cons of land loans
- Deposit for a land loan
- Getting a loan to buy land
With the recently announced HomeBuilder scheme, the construction industry has seen an influx of prospective homeowners looking to build their dream home.
It’s easy to consider how you might fund the building of your house, but how do you finance the purchase of the land you want to build on? A land loan may be the answer.
Looking to compare low-rate, variable home loans for your new build? Below are a handful of low-rate loans in the market.
What is a land loan?
A land loan or vacant land loan is a special type of home loan used to finance the purchase of land you intend to build a property on.
It’s quite different to a normal home loan and a construction loan, which is used to finance the building of a property or renovations.
Land loans typically have higher interest rates, fees, and different conditions to normal home loans, as they’re seen as higher risk.
This is because land prices are much more prone to price fluctuations compared to a regular property and because land is usually harder to sell than an existing home. As a result, there isn’t a very large range of lenders who offer land loans.
Land loans also don’t usually have a time limit on when you need to start construction by, unlike construction loans which typically require building to be completed within one to three years of when the loan was borrowed.
What does a lender consider when it comes to land loans?
With the land loan market much smaller than the regular home loan market, and land loans considered more risky, lenders are very careful about who they will lend too.
When assessing your application, lenders will consider a range of factors which may include:
1. Land size
Land size will dictate the deposit you’re required to pay to obtain the loan. Each lender has different rules but typically you can borrow 95% of the property’s value if the land is up to 2.2 hectares in size or up to 11 hectares in size. Anything bigger than this will usually require a minimum deposit of 20%. You will be required to pay Lenders Mortgage Insurance (LMI) if you have a deposit less than 20%.
It may be possible to borrow 100% of the property’s value if you have a guarantor. However, the larger the land, the harder it can be to get a loan, especially if the land is over 2.2 hectares. In any case, the larger deposit you have, the better chance the lender will loan to you because there’ll be a larger buffer between the size of the loan and the value of the land, meaning that should you default on the loan, there’s a greater chance the lender will be able to recoup the money owed when selling the land.
The lender will want to know whether the land is in a regional or metropolitan area. It also needs to have a road that a standard vehicle can use to access it. The location will also dictate which local council restrictions and zoning regulations apply.
“What are your intentions?” A terrifying question the parent of your new love may ask you and also what the lender will ask you with regards to the land. The lender will want to know whether you will be living in the property or whether you’re purchasing it for investment purposes. They’ll also want to know when you intend to build. If you plan to build in a few years or have no plans at all, you’ll be considered higher risk.
Much like the requirement of a road, your land will need to be within range to connect to an electrical grid. It’s not usually a requirement to have access to town water and sewage facilities, but not having access may limit your borrowing power.
5. Registered land vs unregistered land
Registered land means the land has infrastructure and services connected, like roads and electricity, as well as whatever approval and registration may be necessary with the relevant authorities. Unregistered land has none of this, but developers are able to offer the land for sale and take deposits. However, a lender won’t approve you to borrow money for unregistered land, so if you’re looking to buy this, you’ll have to go it on your own.
Pros of a land loan
The main benefits of land loans include:
Allow you to purchase land: Extremely obvious and no doubt the biggest benefit, a land loan can help you to finance your land purchase where otherwise you wouldn’t have been able too. According to the Housing Industry of Australia, Sydney has the most expensive median capital city land price at $445,000, while the cheapest is found in Hobart at $184,750. The large majority of the population doesn’t have that kind of money lying around.
No time limit for building: Provided your lender knows this and approves you, there’s no time limit for when you have to finish your build, unlike a construction loan. This means you could take your time to save up a deposit for a construction loan, or simply pay down the amount borrowed for your land loan.
Cons of a land loan
There can also be a few downsides to land loans:
Hard to get: With the land loan market so small and the lenders which do offer them considering them risky, it can be very hard to get a land loan. This may mean you have to save up for a larger deposit to get approval, delaying the building of your home.
Higher interest rates and fees: Due to lenders' conservative nature when it comes to land loans the interest rates on land loans are typically much higher than the rates of typical home loans. Some also come with fees not usually seen in regular home loans.
How much deposit do I need to buy land?
The deposit required to buy land will come down to the size of the land and the lender. Different lenders have different rules around the necessary Loan to Value Ratio (LVR) required for the land. Typically, the larger the land, the bigger the required deposit, as large land is even more prone to price fluctuations and increases the risk to the lender.
For land up to 11 hectares, some lenders will allow for just a 5% deposit, Anything above this will often require a minimum 20% deposit, and in some cases, for extremely large land (over 60 hectares) an even larger deposit than this will be required. As these loan applications are few and far between, lenders typically judge them on a case by case basis and as a result, there is no blanket rule.
In any case, if you don’t have a 20% deposit, you’ll often be required to pay for Lenders Mortgage Insurance (LMI), which can cost tens of thousands of dollars.
What to consider when getting a loan to buy land
If you’re thinking about getting a loan to finance your land purchase, there are a number of things you should consider:
1. Interest rate
The interest rate on a land loan is one of the most important factors. Although few lenders offer land loans and those that do often charge higher interest rates, you still need to shop around for the best rate. As little as 10 basis points can make a huge difference in the interest you pay over the life of the loan.
Land loans will typically have similar fees to those you’d expect to pay with home loans. However, some lenders will charge higher fees, while some others may waive fees. It’s again important to look at different lenders to understand which may be offering the better deal. The comparison rate should give you a good idea of the cost of the fees associated with your loan.
3. Required deposit
Some lenders may not lend to you without having at least a 20% deposit for the loan. Others may require an even larger deposit if you’re purchasing an especially large block of land. Even if a lender doesn’t require a 20% deposit, the interest rate may be higher and you’ll probably also have to pay LMI.
Different features of a loan can make paying it off a whole lot easier. Check if the lender will allow you to make additional payments on your loan without penalty, if they offer redraw or offset facilities, or if they allow you to pay off the loan early without penalty.
Savings.com.au’s two cents
There aren’t many people who can outright purchase a block of land, so a land loan could be a viable way for you to start your building journey.
However, land loans not easy to get and you should do your research on the land prior to looking for a loan because you can be sure the lender will be doing theirs on you should you apply.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may inﬂuence the cost of the loan.
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