A land loan, also referred to as a vacant land loan, is a type of home loan product where borrowers want to purchase a block of land to eventually build a house on one day.
These are popular because they aren’t constrained to a specified amount of time, so the vacant land can stand empty for as long as you want. If you want to pay off the land loan over the next few decades and only start building once it’s paid off, you can do so, or you can hold the vacant land and sell it as an investment later in life.
Many home loans are used to purchase an existing home, while a land loan is simply to gain ownership of a block of land.
We’ll discuss everything there is to know about vacant land loans and cover the factors to consider before signing on the dotted line.
How Does Applying For a Vacant Land Loan Work?
Vacant land loans can be more difficult to receive approval for than other types of home loans because lenders perceive them as being riskier. Land prices tend to fluctuate, and a block of land at times can take longer to sell than an existing property.
As a result, land loans often have stricter lending conditions, for example, the lender may require a larger deposit or don’t even offer land only as a security.
Otherwise, vacant land loan applications are relatively similar to applying for a standard home loan. The lender will calculate your borrowing power by assessing your income and the assets and debts you have.
When applying for vacant land loans, the lenders’ valuers assesses the block of land itself, such as:
- how easily accessible it is,
- availability of infrastructures (roads, utilities) and
- what you’re planning on doing on or with the land.
These are all attributes that form part of the valuation.
Factors To Consider Before Applying For a Vacant Land Loan
The required deposit for a land loan will differ depending on each lender and the cost of the land you want to buy. Vacant land loans sometimes have a smaller loan to value ratio (LVR) requirement in comparison to other home loans, so the deposit is generally higher. For example, if the LVR is lower than 80%, you’ll have to pay more than a 20% deposit.
2. The Land Itself
Before buying a block of land, it’s important to determine whether the land is registered or not: lenders don’t approve funds for unregistered land. Registered land is ready for construction as soon as you own the land because all services are connected and road infrastructure is complete.
The dwelling built on the land must be used for personal or investment purposes. The land cannot be used as a working farm but may be approved as just a hobby farm.
How Do Vacant Land Loans Compare To Construction Loans?
A land loan refers to taking out a loan from the bank in order to buy a vacant block of land. While some lenders may require a borrower to build a property on the vacant land within a certain timeframe, most of the time there’s no obligation to start constructing a house immediately.
Construction loans differ because they are loans made to:
- finance building a house on vacant land, or
- finance a major renovation project.
So, with a vacant land loan, the funds are released immediately to be able to buy the land. With a construction loan, the funds are released via a progressive drawdown payment structure. This means, there are specific intervals set out according to major milestones when funds are released periodically.
Construction loans typically only require you to only pay interest on the money you have already used from the loan. And, they usually have a 12 to 18 months building period to be completed.
So, if you aren’t planning on building soon and your block of land will stay vacant for a while, a land loan is probably your best option.
Then, when you decide to start construction down the line, a construction loan could be an option to fund it.
While applying for a vacant land loan to build your own property or investment property isn’t dissimilar to applying for a standard home loan, there are some lenders that don’t do land and construction loans, or land only loans.
Ideally, the land is registered in order to receive loan approval, as this means the block has all required services and infrastructure available, instead of waiting for registration
If you’re a first home buyer, you may be eligible for the FHLDS and can benefit from paying a smaller deposit.
Contact a mortgage broker from The Mortgage Agency to assist with the application process and to help you achieve your property goals.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.