Can I Get A Mortgage On Land Only?

Do I Need A Land Loan?

A land-only mortgage is exactly what it sounds it will be – a loan that helps you buy a vacant block of land. The most important thing to know when you are looking to buy the land is that a land-only mortgage is for land that isn’t income-producing. That means you can’t use it to make a living, such as farming. Ideally, a land-only mortgage can be used if you are looking to one day build a house on the block – including an investment property – or to purchase the land as an investment in itself, to sell at a later date as is, or with some improvements.

Given there is no house or structure involved, most banks and lenders will take a conservative approach to a land-only mortgage, even if you do intend to build on it in the future. That means interest rates may be higher, or a land-only mortgage may attract higher fees and charges. There may also be additional terms and conditions attached to a land-only mortgage, so it is important to understand everything fully before applying.

There are two types of loans that can be suitable for land purchases.

• Variable interest rate. Interest rates can increase or decrease over the life of the loan, depending on a range of internal and external variables.
• Fixed interest rate. Interest rates will be fixed for an agreed time usually between 1 and 5 years. Fixed rate loans mean you will know exactly what your repayments will be over the agreed period.

How much can I borrow with a land-only mortgage?

Finding out how much you might be able to borrow for a land-only mortgage is simple with a Mortgage House Borrowing Calculator. Make sure the information you enter is as accurate as possible, and you’ll be presented with an indication of what you may be able to borrow, as well as your likely repayments.

You will also be presented with a total repayment amount and a graph outlining how your principal and interest repayments decline over the life of the loan. Banks and lenders will assess the block of land before deciding on your application. They will look at things such as location, zoning, and whether or not the land has access to a range of services before working with you on the loan amount options.

What deposit do I need with a land-only mortgage?

Given the nature of buying vacant land, there can be extra risk in a land-only mortgage for banks and landers, especially if the block of land you are buying is large. Lenders can therefore be more conservative when it comes to the Loan-to-Value Ratio, or LVR, they are prepared to attach to the loan. LVR is the percentage of amount you are borrowing compared to the value of the property you are buying.

If you are buying a house, including an investment property, most banks and lenders like to have an LVR of about 80%, which means the borrower needs to have a deposit of about 20%. While some lenders may allow higher LVRs for regular home loans, when it comes to a land-only mortgage you may need a higher deposit to buy the land you are after. If your deposit is not as strong as it could be, it may be worth considering Lenders Mortgage Insurance, or LMI. Taking out LMI may allow you to successfully apply for a land-only mortgage with a smaller deposit.

How is a land-only mortgage different to a construction home loan?

When you are buying a house and land package or looking to build a home on a vacant block of land, constructions loans can be a suitable option. Construction loans can save you money by staggering the payment to the builders once agreed building stages have been met. Interest is only charged on the amount paid out to the builder, not the full amount. Once the final stage has been completed, the regular principal and interest rules apply for the rest of the mortgage.

However, construction loans are only suitable for the building of the home, not the purchase of the land. If you are looking to buy a house and land package, you will need both a construction loan – or regular home loan – and a land-only mortgage. If you are only buying land, then a land-only mortgage could be the more suitable option.  Construction loans require you to build within a certain time, usually around 1 or 2 years, depending on the bank or lender.

What features can I expect from a land-only mortgage?

Whether you are buying a vacant block of land as an investment, to build an investment property on, or even a build a house for you and your family down the track, a land-only mortgage can have a range of features to help you in your endeavor to buy the land you are after. They can include:

• Offset account. If you have a little bit of money put away, you can use it to save interest on your land-only mortgage. Put the money in a non-interest-bearing bank account, and your bank or lender will only charge you interest on the difference between that account, and your mortgage. If you have $20,000 in savings and a mortgage of $420,000, you will only be charged interest in $400,000.
• Additional repayments. Banks and lenders may offer you the chance to make additional repayments to your land-only mortgage without being penalised. This can help pay off your loan sooner and save money on interest.
• Redraw. If you want to make additional repayments but are unsure if your budget can cope with doing it regularly, then having access to a redraw feature can be the solution. With redraw, you can access any additional repayments of lump sums you have made, at any time and for any reason.
• LMI Premium Capitalisation. This is the ability to capitalise the Lenders Mortgage Insurance premium on top of your required loan amount.

Mortgage House

At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.

But don’t worry, we can help with that.

If you’re thinking of buying land and are ready to make the next move buying or investing, you can contact us for information about the best options for you when it comes to your land-only mortgage. Click here to speak to us!