If the countryside’s your thing, then we bet you’ve felt the urge to break free from the shackles of city life at least a couple of times during the pandemic.
Specialised rural home loans can get you closer to your dream, but they come with specific riders. While nearly all banks have stringent rules for land sizes extending beyond 10-15 hectares and properties situated well away from the cities and towns, some lenders would be able to offer you a good deal depending on how you qualify.
Knowing the hows and whys will optimise your search efforts and fetch you the best deal possible. Here are some essential pointers to note when looking for a rural home loan.
Perceptions About Rural Home Loans
In Australia, you can use your rural property for both personal and business purposes. Approvals for rural home loans are less accessible due to a variety of factors:
- They are considered riskier to approve than loans for a home in the suburbs. During drought, floods and economic downturns, the value of rural properties tends to fall and take longer to sell. Fluctuations in land prices – especially in remote areas - are more frequent. Moreover, natural calamities like bushfires create a dent in marketability and push up insurance. These factors make banks adopt a more cautious approach when approving rural home loans.
- In general, there are fewer takers for rural homes. Therefore, if you default or stop repayments, and your bank or lender has to retake possession, it could not only be a long-drawn process but may not be profitable if they have to sell it at discounted rates.
- Also, since banks aren’t into speculation-based investments, they will only consider your property at its present face value. They will not consider any gains or land appreciations you foresee from your purchase. Your interest repayment is their primary source of income.
Nonetheless, suppose you plan to buy a hobby farm and use it mainly for residential purposes, not to generate commercial income. In that case, some lenders still offer rural loans. Don’t give up on your dream of a beautiful rural home just yet!
Land Size and Borrowing Limits for Rural Home Loans
Most lenders are picky about the size of the land you plan to purchase as the larger lots are generally used for commercial farming and, therefore, would fall within the scope of commercial home loans.
In a nutshell, the size of land you plan to buy will determine the deposit that you need to put down.
- For your property size up to 10ha, your home loan application would most likely be handled like a regular residential home loan, which means you may be able to borrow up to 95% of the value of the property being purchased.
- For your property size up to 50ha, if it’s located near a central town, you may have to chip in a deposit that is 10 percent of the property value. You could borrow 90 percent, but this would reduce to 80 percent if the ‘town’ criteria are not met.
- For your property size up to 60ha, you could borrow up to 80 percent of your property value. And, if your property size goes up to 100ha, your borrowing limits will be drawn between 70% – 80% of the property value and subject to your lender’s assessment
While you can benefit from excellent home loan packages and discounts, these are limited to rural property sizes up to 100ha. Property sizes exceeding 100ha are usually treated as commercial farms, and your chances of getting a home loan approved are negligible, even if you plan to use it exclusively as a residential property. Likewise, if you have a guarantor, you may be able to borrow the entire amount depending on your lender.
Residential vs Commercial Property
While you may genuinely want to use it as a getaway home, getting a home loan for your rural home may not be as easy. Banks are highly particular about how to intend to lend you your residential property and will want to know details about how to plan to fund your repayments and that you are not using farming income to repay your loan.
Further, if your lender or bank sees that your property has the potential to become a revenue source - with scope for large commercial plantations, dairy farming, agribusiness, orchards, tourism, cattle rearing etc.- they may cancel your residential loan pathway.
Improve your chances of getting approved for a rural home loan
- Plan ahead: If you have decided to apply for a rural home loan, kickstart the process by investing some time to plan your future and determine which lenders’ terms and conditions and borrowing rates suit you best. Connecting with a good mortgage broker will help you streamline the process and proceed in the correct direction. Banks are more likely to approve your rural home loan for a smaller property. Secondly, suppose you can manage to pay a 20 percent deposit, borrowing only 80 percent of the property value. In that case, some lenders will be yet willing to approve your application without running it past their commercial credit teams.
- Financial stability: Like in regular home loans, providing proof of your financial stability with documentation related to your income, employment and asset position will assure your lender that you are not dependent on farm income. It’s a big plus to get your home loan application past the finishing line with some lenders.
- Feasibility of location: Banks are highly wary of financing loans for remote areas because of the potential risks associated with them. Do some research on the postcode restriction that some lenders have implemented for rural home loans. Suppose your rural residential property is not included in the lender's list of approved postcodes. In that case, it’s a sign that you may not qualify for approval unless you reconsider the property or move on to another lender.
- Convenient Accessibility: For obvious reasons, banks and lenders are more likely to favour properties that have easy accessibility. Dirt roads are familiar in rural properties, but they have to be motorable and easy for vehicles to access the property.
- Amenities and Infrastructure: Your rural home loan is more likely to get approved if your rural residential property has access to essential infrastructure, including water supply, electricity and sewage. If your property is a self-sustainable model, it may yet be a good idea to have these amenities in place and functional to make your application a lot more reassuring to your lender.
- Area Zoning: For your rural residential property to be categorised as a hobby farm rather than a commercial farm, your land will need to be zoned as rural, rural residential or its equivalent, based on the state it is located in. If your property comes under the industrial, commercial or ‘for farm use’ zone, it may affect your chances of securing a rural home loan approval as it may be considered a commercial farm.
Additionally, lenders have their methods for assessing rural properties, and while some may disapprove of some particular zonings, some’ll only consider aspects such as land size and usage.
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