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.
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.
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.
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.
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:
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.
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.
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 has the following zoning classifications:
New South Wales has the following zoning classifications:
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.
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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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:
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.
Lenders assess various things before approving a loan application for a hobby farm. They will want to see the following:
If you want to go ahead with a hobby farm purchase, you should keep the following quick tips in mind: