Buying land to build on later: what you need to know
You’ve seen the perfect piece of land but you’re not quite ready to build. No problem – a land loan can be a handy finance solution. However, it can work a bit differently from a regular home loan. Here’s what you need to know.
Not everyone wants to buy an established home or even a house and land package.
Sometimes you just want to buy a vacant block, pay it down and give yourself a breather before paying for the cost of building a home.
Or maybe you’ve seen an exceptional block listed for sale that ticks all the boxes for your ideal future home site – and it just seems too good an opportunity to miss.
Whatever the case, it could be possible to take out a loan for land only. Here’s how it works.
What is a land loan?
Land loans, also known as vacant land loans, are dedicated to financing the purchase of a vacant block.
In some respects, these loans work along the same lines as a traditional mortgage in that you pay a deposit, borrow a set amount and then select fixed versus variable rate options.
There may even be the opportunity to add an offset account or make interest-only payments rather than principal plus interest repayments.
But it pays to read the fine print. Depending on the lender and product you choose, land loans can come with unique conditions that you need to be aware of.
You may need a bigger deposit
Vacant land can potentially take longer to sell than an established house and land.
This raises risk for a lender, should you default on your repayments and (after other possible avenues are exhausted) the bank has to repossess and sell your property.
Banks may manage this risk by asking borrowers for a bigger deposit – one that goes beyond the standard 20% down payment.
The bigger the block, the bigger the deposit you may be required to have, particularly if you’re buying vacant acreage.
You could pay a higher rate
As lenders may see vacant land as higher risk, you may be asked to pay a higher interest rate compared to a regular home loan.
This highlights the importance of talking to us before you commit to buying.
By doing so, you can be more confident that you can manage the loan repayments – and are paying a competitive interest rate.
You may be required to build within a set timeframe
In general, lenders often like to see that a borrower has plans to build on vacant land within a few years of buying the block.
Your lender may even require you to construct a home within a set time period. Not always, but sometimes.
This is another factor you should talk to us about.
A requirement to build by a specific deadline has the potential to reshape your plans, including what you can afford to build and how you’ll finance it (potentially a construction loan).
Talk to us before you buy
Buying vacant land now and building later can seem like a cost-effective way to get your dream home in your ideal location.
But there are plenty of other factors that lenders will also want to consider before approving an application, including access to the site, the shape and make-up of the land, and what service utilities you’ll be able to tap into.
So if you’ve been eyeing off a vacant block, give us a call first to find out what land loan options might be available.
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