Whether you’re shopping for a vacant block of land to eventually build on it for your dream home or an investment property, you might require a land loan. This is a great option for people looking to expand their property portfolio with land as a future investment or use it for residential purposes instead.
If you’re unfamiliar with the concept of a land loan, there are several things you might need to know first.
Does a Land Loan Differ From a Home Loan?
Land loans (also known as vacant land loans) allow borrowers to access the financing that would enable them to purchase a vacant block of raw land.
There are some similarities between land and home loans, such as the ability to choose a standard variable, fixed or split interest rate, and linking it to an offset account. Plus, you might also be able to elect interest-only repayments initially, as well as access to redraw advantages.
Are Construction Loans Different?
Land loans also differ from construction loans, which are a type of home loan. A construction loan is generally a limit you draw from everytime a construction stage completes, this loan is always interest only repayment until its fully completed. , a land loan covers only the purchase of the block of land itself.
It’s common for people to obtain a land loan first, before looking at construction loans further down the track. This allows them to secure the perfect block of land they might’ve found but aren’t yet ready to build on.
Plus, if you obtain a construction loan, your lender will provide you with a timeframe in which the work needs to be completed, while it can be a bit more flexible with land loans.
What to Consider When Applying For a Vacant Land Loan?
If you’ve decided this type of loan is perfect for you, you’ll need to consider the following factors:
The Location
Securing the funds to purchase land depends on the land blocks you’re looking at and their location.
Lenders will look at your proposed locations to determine your eligibility, which is a big part of determining the cost and value of that particular land. For example, if you’re hoping to purchase land in a regional area, there might not be connected services, such as access roads and grid utilities.
Lenders will also look at the zoning regulations of the proposed area, which will impact your options of building further down the track between commercial and residential.
The Size of Land
The size of the land is also an important factor a lender will consider when you apply for a land loan. As it needs to be a suitable security in order for the lender to accept it as collateral.
Registered or Unregistered Land
Land being sold in new estates are generally sold as unregistered blocks of lands, and lenders will only settle the loan once it’s registered.
Conducting a title search is a useful way to help you determine whether you’re looking at registered or unregistered land.
Future Intention to Build
Lenders will also look at your immediate plans for the land after your loan is approved.
So you’ll need to know whether you’ll be looking at applying for a construction loan and commence building immediately. Or will you be holding onto the land for a while before you take any further action?
What About the Interest Rate and Deposit?
Typically, a land loan would cost the same as a regular home loan – even though you’re just buying the land. Land loans generally have more risk associated with them due to the fluctuations that happen more frequently with land prices.
Lenders will be more conservative when determining prices and rates because land tends to take longer to sell. Plus, there isn’t a property the lender can rely on as collateral if the borrower defaults. So lenders will compensate for this, which is why land loan interest rates are typically higher than for a home loan. A larger upfront deposit is usually needed too.
Depending on the size of the land and your overall deposit, you might also be required to pay lenders mortgage insurance too. Additionally, these loans typically have a shorter loan term than traditional mortgages, usually around five to ten years.
This is because the lender assumes the borrower will be developing the land and will have the ability to fulfil the total loan repayments within a shorter period of time. And many lenders will allow you to make additional repayments, enabling you to pay down loan amounts much faster.
Key Takeaways
A land loan can be a great financing option allowing you to purchase a vacant block of land.
While there are similarities between land loans, construction loans and home loans, it’s important to remember there are differences, and these differences will impact things like the interest rate, the deposit you need and any particulars like time frames and locations.
If you need support untangling the differences between land and home loans or guidance figuring out why this might be your best option, schedule an appointment with us today!
