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Land loans in a nutshell:
- For a land loan, most lenders require building plans that will start within the next 18 months, so you likely won’t be able to buy land just to hold onto it (known as land banking).
- Lenders have different levels of risk tolerance, but they mainly consider the land’s location and your borrowing power when assessing land loans.
- Land loan rates start from around 7% p.a. and generally require a minimum 20% deposit. They also have stricter requirements and are not available from all lenders.
What is a land loan?
A land loan, or vacant land loan, is a type of mortgage used to buy an undeveloped block of land. Unlike standard home loans, which typically cover the cost of both a home and the land it sits on, a land loan is only for purchasing the land itself.
Land loans are popular among borrowers who plan to build a house at a later date but may not have immediate construction plans.
Others may buy vacant land as an investment with the intention of selling it down the track if it goes up in value, a practice known as ‘land banking’. However, this is less common now because most lenders want to know what will be built and when.
How does a land loan work?
A land loan allows you to buy a block of land with the vacant lot acting as security for the loan. Like a standard mortgage, you’ll repay the loan over time with interest for a specified term. However, because land can be riskier for lenders, these loans often come with stricter terms and conditions, such as a larger deposit or plans to build within 18 months.
When applying for a land loan, the lender will look at several factors to decide how much you can borrow. These include:
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The amount of money you put down as a deposit or the usable equity of any property you already own.
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Whether you earn a regular salary (PAYG) or are self-employed.
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Your day-to-day living costs and any existing debts you have.
Fact: The size of your deposit affects your loan-to-value ratio (LVR), which is the ratio of your loan amount to the value of the land. A lower LVR usually means lower interest rates, while a higher LVR often leads to higher rates. If your LVR is above 80%, you may also need to pay Lender’s Mortgage Insurance (LMI).
Key considerations about land loans
Here are five key factors banks consider when assessing a land loan application:
Location
Where the land is situated is a major consideration for lenders, even down to the specific postcode.
LVR
Each lender will have a different risk appetite, but your loan-to-value ratio (LVR) usually needs to be 80%, although some lenders may accept a higher LVR.
Shape
The shape and orientation will also be considered, such as if it’s a narrow or sloped block that might need a retaining wall or stilt home. This can affect the property’s resale value and limit its market demand.
Size
What’s the size of the vacant block? Some lenders may require a larger deposit for bigger blocks because they involve greater risk, such as the need for regular maintenance.
Intention to build
Some lenders won’t approve your loan application unless you have plans to build within the next 18 months or have a building contract. Lenders typically view applications without construction plans as riskier.
Buying land pros and cons
- Lower maintenance costs as there’s no dwelling on the land.
- Owning land gives you the freedom to build a property that suits your specific needs and preferences, including custom home designs.
- Provide access to a wide range of land types and locations, allowing you to choose a block that best fits your long-term goals.
- Buying land can be a good investment if the land’s value increases over time, potentially leading to a profit when you sell.
- Often come with higher interest rates compared to standard home loans due to the perceived higher risk for lenders.
- May require a larger deposit and more stringent conditions for land loans, such as detailed development plans or building contracts.
- Land doesn’t generate rental income or immediate returns, which can be a drawback if you’re looking for investment properties that provide cash flow.
- Even if you don’t develop the land right away, you might still incur costs for maintenance, like soil tests and landscaping.
Tip: A common myth is that if the value of your land increases after purchase, the LVR for a construction loan will be based on the new, higher value. In reality, the LVR for a construction loan is based on the original purchase price of the land, not its current market value.
How to apply for a land loan and what happens next?
Here’s a step-by-step breakdown of how to apply for a land loan and what generally happens afterwards.
1
Application proces
You start by applying for a land loan through a lender or a mortgage broker. You’ll need to provide details about the land you want to buy, including its location and size, as well as your financial information to show you can repay the loan.
2
Loan terms and conditions
The lender will review your application and may offer you a loan with specific terms, such as the loan amount, interest rate and repayment period. Land loans often come with stricter terms than standard home loans because land is considered riskier to finance.
3
Approval and settlement
Once your loan is approved, you will move to settlement. This is when the loan amount is paid to the seller of the land and you officially take ownership of the vacant block.
4
Repayment
You make regular repayments to the lender, either weekly, fortnightly or monthly. The duration of the loan can vary, but many land loans have shorter terms compared to home loans.
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Building plans
If you plan to build on the land later, you might also need a construction loan, which can be obtained separately. You’ll need to take out a construction loan with the same lender as banks and other financial institutions won’t share the asset (i.e. your home and the land it's on).
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Special considerations
Land loans can have specific conditions, such as requiring the land to be suitable for building or limiting the loan to certain types of land.
FAQs about land loans
How much deposit do you need for a land loan?
You’ll usually need a deposit of at least 5% of the land’s value. However, to avoid paying Lender’s Mortgage Insurance (LMI), most banks will ask for a 20% deposit, while others may need as much as 30%. Additionally, the size of your deposit can affect the interest rate your lender offers - generally, a larger deposit means a better rate.
Do you have to prove you’re building if you buy land?
Most lenders prefer not to give out loans for land without a clear plan for what you intend to do with it. Many will require a building contract or plans showing your intention to build before they approve a loan. If you’re looking to buy land just to resell it later for a profit, you might face challenges. While some lenders might allow this, it’s usually only for borrowers who already have significant equity, with a loan-to-value ratio (LVR) below 65%.
Can you buy land as a first-time home buyer?
Yes, you can buy land as a first home buyer, but it’s usually very rare. Lenders often require a larger deposit of 20-30% for land loans because they view land as a riskier investment. Some specialist lenders might accept lower deposits, but they usually charge higher fees, including risk fees of 1-1.5%.
What is the difference between a land loan and construction loan?
A land loan is used to purchase a vacant plot of land and provides the full loan amount upfront, with interest paid on the entire sum from the start. This type of loan is suitable if you hold or resell the land without immediate construction.
A construction loan is intended for building a new property or major renovations, with funds released in stages based on construction progress. Interest is only paid on the amounts drawn down during construction, and the full loan amount is paid off once the build is complete. Construction loans also require a building contract and often have deadlines for starting the construction.
How does a home and land package work?
A home and land package typically involves purchasing a piece of land and a new home together as a single combined offer from a developer. This arrangement often requires securing two separate loans: a land loan to cover the cost of the land, and a construction loan to finance the building of the home, according to CBA.
Initially, you will take out a standard mortgage to buy the land, with the fund usually provided as a lump sum. Once a building contract is in place, you apply for a construction loan to fund the construction, which is disbursed in stages as work progresses. This approach simplifies the home-buying process by bundling the purchase and construction into one package, although it is important to understand the inclusions, exclusions, and any additional costs involved.