Getting a home loan for vacant land

When it comes to building your own home, what sort of loan do you need? And will it be any more difficult to get than a home loan for a property already built? Let’s find out.

A vacant land loan is a home loan from a bank or lender used to purchase an empty block of land. Rather than buying property that already exists, many people dream of building their own homes and a vacant land loan enables them to achieve this dream. Most people purchase vacant land with the intent to build property on it in the near future.

A land loan is different to a construction loan, which is a loan sought to facilitate building of any kind – be it renovations, demolition or a rebuild. A vacant land loan or land loan secures a loan just for the land. Some people secure a loan for land first and add a construction loan onto it later – others apply for both at the same time.

This is also different to an off-the-plan loan, which refers to a house and land package that is owned by a developer. The developer builds the home and you pay them in one go, as opposed to a construction loan, which is paid in stages.

Securing a land loan

Securing a land loan is really no different to securing a regular loan. There are some lenders that may be more cautious, generally because you may find the value of your vacant land drops if the economy starts to struggle and there will be fewer people who want to buy the land. However, it’s certainly not impossible to borrow money for a vacant land purchase.

Some lenders may also restrict you based on location. Other than this, the interest rates you are eligible for will tend to be the same as those available to someone buying an established property. UNO can run you through the best variable rates and fixed rates available to you, as well any ongoing fees, access to offset accounts and redraw facilities that come with certain products.

If you plan to hold onto the land for investment purposes, you may be offered an interest-only loan. Otherwise, a principal and interest loan will most likely be recommended.

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What’s my borrowing power

The amount of land you want to buy has an effect on how much you can borrow – as does your deposit size.

As a general rule: For land that is less than 2.2 hectares and up to a maximum size of 11 hectares, most lenders will accept a 5% deposit plus costs such as stamp duty or Lender’s Mortgage Insurance (LMI) – or a loan-to-value ratio (LVR) of 95%. Your LVR is how much money you have for a deposit compared to the land value (or property value if you are purchasing an established home).

For land that ranges from 11 hectares up to 60 hectares in size, you’ll need a deposit of at least 20% (or an LVR of at least 80%) plus costs.

For vacant land that’s less than 2.2 hectares in size, lenders will want you to have a low LVR, because paying a larger portion of the value of your vacant land shows that you’re financially secure.

A few lenders may even allow you to use a guarantor.

How much can I borrow?

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You’ll also need to show the lender how you intend to use the land. Will you hold onto it as an investment or use it to build an investment property? Or do you plan to build a house and use it for residential purposes? Note that some lenders require you to start construction within 12 months.

Finally, while there are construction loans available for building property, if you already have a vacant land loan, you need only apply for a loan variation from the same lender once you commence construction. It’s an easy process but does require two applications.

Physical considerations

Furthermore, you must be able to access the land using a well-maintained road, and you should be able to connect electricity to any properties you build without large costs.

John Oehlers, managing director of Tamworth real estate specialists, Professionals Tamworth splits his time between Sydney and regional NSW and specialises in purchasing vacant land for residential and commercial clients.

With vacant land, he says it’s important to look at all aspects of the land, such as the area for the driveway, gardens and trees. “In my experience dealing with buyers over the years, that gets overlooked. If the block is on a slope and you’re at the bottom of the hill, what’s the runoff? What’s the drainage like? I’d be checking the drainage, because very often these days, you see subdivisions that are on the side of the hill, that are going up and down a hill, so I would make sure that drainage is a key one.”

Location Location

Oehlers also says to consider the location carefully and get advice from a financial planner, investor or solicitor. “Is the location where you think you’re going to get some capital growth? Could you get some advice around the location and infrastructure. If it’s a brand new subdivision, is there anything going in close by: trains, schools, shopping centres?

“You just need to be aware of what’s going on in the area. Be aware: are you building near an airport? It may not impact on the price negatively over the years because it might be that people accept it and there’s growth out that way. But you just need to be aware of those things.”

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