If you’ve spotted a vacant land that strikes a chord with you, you could pick up a land loan to buy it. Whether you build your dream house on it or not, land is a relatively safe investment. It generally yields good returns in the long term.
Getting a land loan that matches your requirements will most likely be your first step in this direction. These handy hints will help you make informed decisions.
What are Land Loans?
Land loans are loans offered by your bank or lender to purchase and gain ownership of a vacant plot of land. The two main reasons buyers purchase land are because they intend to:
- Construct a house on it someday in the future
- For investment purposes (to sell) when land value appreciates!
Lenders will use the land as security for your loan. However, lenders approach loan applications with great caution. Your loan terms and conditions will also be stricter than traditional home loan applications.
Land Loans and Banks
Land prices, especially in remote areas, tend to fluctuate in a weakened economy and generally take longer to sell. Banks, therefore, are very meticulous in assessing applications for land loans.
On the positive side, lending criteria and guidelines vary, so there’s a good chance that you will still get approved for a land loan.
Borrowing Limit for Different Block Sizes
Banks implement strict lending procedures for vacant land blocks compared to actual properties. They do not offer loans on remote or large properties in most cases.
Here’s an overview of the borrowing limits:
- For land size up to 2.2 hectares, you can borrow up to 95% of your property value.
- For land size up to 11 hectares, banks will loan you up to 95% of the property value. However, some restrict it to 80% of your property value.
- For land size up to 50 hectares, you may be able to borrow up to 95% of your property value if there’s already a house on the land you want to buy.
- As land sizes increase up to 60 hectares, lenders will offer you loans up to 80% of your property value. At this point, while lenders may refuse your loan application, you could approach those catering to hobby farms (rural properties where small-scale farming is carried out).
- Up to 97 hectares, you would still be able to find lenders loaning up to 80% of your property value. However, once you cross this land size, your application for a land loan will be assessed on a case basis.
Some lenders offer loans up to 100% of the property value for guarantor loans.
How Banks Assess Land Loans
Size of Land
The bigger the land, the fewer people who would be interested in purchasing it. Likewise, since borrowing limits vary based on land and lending criteria, the land size will determine how much you qualify to borrow and the deposit amount you’ll need to pay.
Location and Accessibility
The location of the land you want to buy is a critical factor when banks assess your loan application. They will check the location’s accessibility and zoning regulations during the assessment process.
If your land is close to major cities and regional centres and has proper roads, you may find it easier to get a loan than in a remote location lacking adequate road access for standard vehicles (not 4-WD). Dirt roads are accepted as long as they’re motorable and well maintained.
Some lenders do not have such restrictions, so look for these lenders if your land is in a remote place.
Banks will review if your land is zoned rural or rural residential. If it is, they’ll consider your application. If your land is zoned commercial, industrial, and farm/agricultural, it will be assessed on a case basis.
Similarly, if your block of land is subject to GST, it will be considered commercial property by your bank.
Infrastructure and Amenities
Your land should have good connectivity to the electricity grid without high costs. Town water and sewerage services aren’t mandatory since many Australian properties have septic tanks or water tanks.
Nonetheless, some lenders may limit borrowing to 80% of the value of your property if these amenities are not in place.
Registered vs Unregistered
When selecting your land, find out if it is written or not, especially if you plan for a loan. If your land is registered, it implies that all services and infrastructure are in order, and you can go ahead in building your home. Lenders do not approve loans for unregistered land.
Land Use Purpose
To get approved for a loan, you should note that your land property should be used for personal or investment purposes, not as a farm.
Some lenders will still fund your purchase if you incorporate minor improvements in your hobby farm that fetches you some income from farm production activities.
Intent to Build
There’s no compulsion to have ready plans to build on your land. However, your lenders will consider you a lower-risk case if you intend to build on the land right away or within a few months instead of a few years down the line. They may assess you to be a speculative investor in the latter case and refuse your loan.
What to Consider for Land Loans
There are some key considerations that you should take into account before applying for a land loan.
Your Borrowing Power
Like with all other home loans, your lender will assess income, assets, credit score, liabilities, and debts to determine your borrowing power. Prepare all the required documentation, including your ID proof, tax returns, employment contracts, payslips, investment, and other documents to prove your financial stability. Likewise, ensure all our debts, credit card payments, etc., are clear, and you illustrate an excellent credit history.
As banks tend to treat land loans as riskier than other home loans, they generally offer them at higher interest rates. This translates into you having to pay a more significant sum over the lifespan of your loan. It’s important to do some groundwork using tools like Joust’s home loan comparison calculator to compare the different loans available and select the one offering you the most competitive and lowest interest rates.
Fees and Other Charges
Some lenders may charge you higher fees due to the increased risk attached to land loans. This is a critical factor when comparing loan products. Study the comparison rates of different lenders to get an approximate idea of the entire yearly cost of your loan, including the fees, interest amount, and other charges that apply. Australian lenders must disclose this to you, along with the interest rate on your loan.
The lower the LVR of your loan, the bigger the deposit you will have to pay and vice versa. Even so, it is necessary to go over the comparison rate of the loan and study how much you will finally land up spending when interest, fees, and other charges are taken into account.
Approaching your lender with a clear strategy of what you plan to do with your land may improve your chances of getting approved on more favourable terms and conditions.
Discover your Borrowing Capacity with Joust Mortgage Calculators
Joust’s free home loan calculators help you conveniently discover your borrowing capacity in a highly secure environment using the latest technology. Choose the appropriate calculator, fill in the required information, and get the results.
Our user-friendly mortgage calculators are free to use and provide you with an estimate to help you plan your home loan application.