What is Land Finance?
Do you need a land loan for investment purposes? Looking to buy land, build condos and sell? Understanding and using land finance can help you secure a block of land—at today’s prices—even though you might not be ready to build for quite a period of time. Land finance is also used to help developers looking to take a greenfield or brownfield site and develop it as a residential subdivision for the creation of new communities. Land loans can cover a variety of purposes and it is vital for potential land owners to be aware of the different options and types of loans available.
What are Land Loans?
A loan for land is different from a traditional property loan. A land loan is typically used to purchase a vacant lot, especially as an investment for building a house or units in the future. In such a case, the land itself is used as security for the loan. From the viewpoint of the lender, a land loan can be more risky than a regular loan for a house and land. Not only are land prices prone to fluctuation, but land (by itself) can be perceived as harder to sell because potential home owners usually prefer to buy existing houses and avoid the headaches of new construction. For this reason, lenders might have stricter lending conditions and require bigger deposits and interest rates for vacant land loans.
Registered vs Unregistered Land
It is very important to find out if the land you intend to purchase is registered or unregistered. Why? Because you will not be able to start construction until the land is registered. To clarify, the main difference between registered and unregistered land is a Certificate of Title, which is registered with the Land Registry.
To buy unregistered land, you sign a Contract of Sale with a developer who undertakes the development (such as road infrastructure and connecting all services) and registration of the land for you. This requires a deposit, and you later pay the balance once the land is registered. Lenders for land loans will not approve funds until the land is registered because they first require a land valuation, which can only be done after registration.
Key Factors to Consider for Your Land Loan
The main considerations to evaluate when seeking a land loan are:
- The size of your block can influence the size of your down payment and approval.
- The block’s location has an influence on your loan terms.
- Your future plans to build on the block affect your lender’s risk assessment.
Land Size and Its Implications
The biggest priority, of course, is getting the right-sized block to match your needs. However, while different lenders have different rules, you should bear in mind that the size of your land generally dictates how big your deposit will have to be. For example, with an 11-hectare property, you might be required to pay a deposit of 20%. Also, in the case of a default, many lenders feel that large blocks are harder to sell because fewer people will be interested in buying a bigger area of land.
The Significance of Location
Your land’s location plays a significant role in determining the feasibility of your investment and the terms of your loan.
- Is your block of land in a capital city or regional centre? Or is it in a remote area?
- Does it have sealed roads so that a standard vehicle can access it easily?
- What sort of environment is it in? Is it near a creek or river (and therefore prone to occasional flooding)? Is it in an area at bushfire risk?
- What zoning regulations apply to your area? What are the local council restrictions?
In remote or hard-to-access areas, lenders might be more reluctant to provide a mortgage for your land.
The Intent to Build: Planning Ahead
Having a future building plan can positively influence your loan terms and the lender’s risk assessment. Many lenders feel that it is easier and more reliable to sell land with a house than just a vacant lot in case of a default. Many buyers purchase their vacant block with the intention of building a home on it in the near future. Please note that a land loan (vacant land loan) is different to a construction loan.
Vacant Land Loans vs Construction Loans
A land loan lends money for the purchase of the land only. This secures your land at current prices and safeguards against future price rises. A construction loan dispenses money in instalments for each stage of your construction project. This project can range from renovating to building a new house or units. A construction loan for a new house, for example, is designed to pay your licensed builder a portion of the total money at each completed step. Typically, these are paid at the completion of the slab, frame, lockup, fit out and final touches.
Navigating Land Loan Interest Rates
How are interest rates for land loans determined? Because lenders view vacant land loans as riskier than loans for a house and land, they might charge higher interest rates and fees. Interest rates are also determined by how much of the property value you are borrowing against. A lender might, for example, offer a rate comparable to a house and land loan if you only borrow up to 60% of the property value. This would require you to put up a 40% deposit, however. When comparing interest rates, it is best to calculate the total cost with total interest, fees and charges factored in.
Opting for House and Land Packages
What is a house and land package? This is where the purchase of your land and the construction of your home are combined together. Typically, this can be done in either of two ways:
- A developer offers a “turnkey” solution where you select from one of their standard house designs. Then, they develop the estate and construct the property on your lot.
- You decide to buy a vacant lot and have your investment property constructed by the builder of your choice. Lenders can provide a house and land package for this approach by combining the purchase into one process, although with two contracts—one for the land loan and the other for the construction loan.
An advantage of a house and land package is that stamp duty is only payable on the land as opposed to purchasing an established home.
Benefits for Investors
Here are some of the benefits of buying vacant land for investors:
- Vacant land is appreciably cheaper than land with a building.
- Land value appreciates over time, and this can go even higher as future developments, such as train lines, roads, and commercial developments, take place.
- It requires very little maintenance, save for occasionally mowing the lawn, compared to maintaining buildings.
- You have got flexible options, such as building on it in the future to maximise your investment.
Contact Us Today!
To make an informed financial decision about land loans, it is essential to understand the factors involved in land finance. These include researching the most favourable interest rates and deposit amounts, the land’s location, size, and whether it is registered or unregistered.
At MFEG, we understand the importance of land finance and getting the right advice. To find out how we can help you, contact us for a tailor-made solution for your needs!
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