Can I get a loan for my hobby farm?

You may feel the urge to escape city life and move out into the country. It’s an attractive proposition, which is why many people have decided to set up hobby farms in recent years.

Unfortunately, many lenders see hobby farms as risky investments. As a result, they’re often hesitant to offer home loan products for hobby farms.

What is a hobby farm?

A hobby farm is any rural home or patch of land that you buy with the intention of setting up a small farm.

Most do this for personal reasons, so most hobby farms don’t become fully-fledged businesses. However, it is possible to turn a hobby farm into another income source.

Hobby farm activities vary depending on the borrower. Some raise livestock, such as cattle and pigs, whereas others grow crops.

Your lender will ask about what you intend to do with the property before approving your home loan application. As a general rule, lenders prefer hobby farms and small-scale farms to large commercial farms.

How much can I borrow?

The larger the hobby farm, the more wary your lender becomes. Furthermore, each lender differs with regard to the loan-to-value ratios (LVR) they’ll offer. You can use the following as a general guide, but you’ll have to speak to your lender to find out more specific details.

• 100% LVR – Only available with a guarantor home loan
• 95% LVR – Available for most hobby farms not exceeding 50 hectares
• 80% LVR – Sometimes available for hobby farms between 50 and 60 hectares. Some lenders may offer 80% LVR on hobby farms larger than 60 hectares
• 70% LVR – Sometimes available for hobby farms between 60 and 100 hectares in size.

Most lenders don’t consider rural land in excess of 100 hectares as hobby farms. You may need to secure a commercial loan for a large farm, though lenders usually limit these to 60% LVR.

The situation changes if you intend to use your hobby farm as an investment. Most lenders will not grant you a loan for a hobby farm if your LVR is above 90%, although if you have an LVR of 95% you may be able to invest in a hobby farm that is less than two hectares in land size.

What is an income-producing hobby farm?

Your valuer will help you figure out if your hobby farm can generate income. You will be able to claim your expenses against other forms of income if the property meets certain criteria, including:

• If the value of the property on the land exceeds $500,000;
• Your hobby farm has made a taxable profit for three years out of the previous five (this includes the current business year);
• The farm has a minimum annual turnover of $20,000.

A valuer will class your hobby farm as ‘income-producing’ if you hope to use some of its income to make home loan repayments, and you aim to develop the farm for further farming activities.

However, you may find that some lenders only offer commercial loans if your hobby farm produces income.

Do hobby farms make good investments?

It’s best to speak to a financial professional before making the decision to buy a hobby farm. However, many people have found they can profit from their hobby farms.

Demand for hobby farms that are close to Australia’s capital cities is quite strong, so it’s possible to turn a profit through selling. However, you will often need to invest heavily into the farm to make it attractive to buyers.

Are there restrictions on location?

Many lenders apply restrictions to home loan applications based on the location of the property.

Furthermore, you’ll need to consider zoning before applying for your loan. How zoning affects you differs depending on the state:

Victoria

Victoria has the following zoning classifications:

• Rural Conservation Zone (RCZ): These are rural areas that have environmental significance. You should be able to build a single property on an RCZ.
• Rural Living Zone (RLZ): These are areas where rural living takes precedence over farming.
• Rural Activity Zone (RAZ): This is the most flexible zoning classification. RAZ zoning allows you to use your rural land for business, farming and residential use.
• Farming Zone: This is the classification most commonly given to commercial and hobby farms.

New South Wales

New South Wales has the following zoning classifications:

• Primary Production: These are areas used for large-scale farming purposes.
• General Residential: This is the zoning for small rural properties that are near regional centres and less than two hectares in size.
• Rural Landscape: This is the most flexible rural zoning classification in New South Wales. This allows you to use your property for residential use, farming and tourism.
• Large-Lot Residential: Formerly the Rural Residential Zone classification, this zone covers homes in rural areas.
• Rural Small Holdings: This is the zoning most commonly used for hobby farms.

All other states

The rest of Australia’s states determine zoning on a council-by-council basis. As such, we cannot provide a general overview of which zoning classification may apply to your property. It’s best that you speak to your local council to find out more.

The location and zoning both determine how much you can borrow. Furthermore, online home loan rates differ depending on the lender, so it’s best to speak to one of our mortgage advisers to find out about the available loans.

Can I get a standard home loan?

Some lenders will allow you to apply for a standard home loan for your hobby farm. To do this, you will need a strong application and a sizeable deposit.

For example, you may receive approval for a standard home loan if you offer a 20% deposit, and all the equipment needed for your hobby farm is already on-site.

Even then, you need to prove that you can make your repayments on the loan without relying on your hobby farm’s income.

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Can I make improvements to a hobby farm?

There are no set rules for the improvements you can make to your hobby farm. However, the more income the farm produces the more likely it is that your lender will consider it to be a commercial farm. Generally, you should find that most lenders accept the following hobby farm improvements:

• An orchard that does not generate income
• A house
• Small sheds for machinery
• Paddocks
• A small amount of livestock
• Dams

Lenders also consider how likely you are to use the property as a home. Speak to a professional before making any improvements so you don’t unwittingly turn your hobby farm into a commercial farm.

What else will my lender assess?

Lenders assess various things before approving a loan application for a hobby farm. They will want to see the following:

• The size of the land does not exceed 10 hectares. Some lenders offer hobby farm loans for land size up to 50 hectares, as long as you can prove that you won’t use the farm for commercial purposes.
• There is unrestricted access to the land in all weather conditions.
• Whether you can connect to the electricity grid without the need to rely on solar power. Lenders also become wary if it costs a lot to maintain your electricity connection.
• The zoning classification applied to the land.
• If the land falls into the lender’s postcode zones.
• Confirmation that you will only use the land for investment or personal purposes.

Quick tips for finding a hobby farm

If you want to go ahead with a hobby farm purchase, you should keep the following quick tips in mind:

• Ensure the land can cope with what you have planned. For example, you will need to check the fertility of the soil, and whether there are any grazing patches for livestock.
• Speak to the local council to find out what you can build on the land.
• Check about any future developments in the area. Changes in zoning laws could result in construction taking place near your hobby farm.
• Find out if the farm comes with equipment, paddocks, fences, and feeding apparatus. You should also check equipment to ensure it meets farming regulations.
• Research the legal restrictions that your state or local council places on hobby farms.