What is a land loan?
A land loan or vacant land loan is a type of home loan that borrowers obtain from a bank or other lender to purchase an empty block of land. The intention is usually that the borrower can build a new home on the vacant land.
A loan for land purchase is not the same as a regular home loan, and it usually comes with different costs and conditions. Land loans typically have higher deposit requirements and higher interest rates, as most lenders see them as a riskier proposition than a traditional home loan.
Are vacant land loans the same as construction loans?
No. The main difference between vacant land loans and construction loans is that a construction loan sets a time limit on when the house must be completely built – usually a deadline of one to three years. Land loans do not have this time pressure, so you don’t need to build straightaway. Construction loans also typically have a different process for releasing money compared to a land loan. The funds are progressively ‘drawn-down’ in stages as the construction proceeds, whereas for a land loan it is given all at once.
Vacant land loans are often used instead of construction loans when the borrower knows that they won’t be able to commence or complete construction on the plot for at least 12 months. You can compare construction loans on the Canstar website.
What to think about when choosing vacant land loans
Before you apply for a land loan, here are some important things to consider when looking for a loan to purchase land.
Banks are usually more conservative with land loans
Banks are often more careful when considering applications for a loan to purchase land. Many lenders view vacant land loans as more risky than other types of home loans for reasons such as the following:
- Land prices can fluctuate much more rapidly than the price of an existing home, particularly in regional areas.
- Vacant land can take longer to sell than an existing home.
Lenders may worry about what will happen if you default on your loan and they end up with a plot of land with no house on it.
For this reason, vacant land loans are often harder to find in Australia than construction loans or home loans to buy a house and land package.
If you think you will be ready to start building your house in the near future, you may wish to consider a construction loan rather than a land loan. The table below displays a snapshot of principal and interest variable home loan products available for construction on Canstar’s database, sorted by star rating and then alphabetically by provider. The products and star ratings displayed are based on a loan amount of $600,000 at 80% LVR for a property in NSW. Check upfront with your provider and read the loan documentation to confirm the details of a particular loan product and whether it meets your needs before deciding to commit to it.
The size of the plot of land is an important consideration when looking for a land loan.
In general, the bigger the vacant plot, the lower the proportion of the property value you will be able to borrow.
Location, location, location
The location, access, and zoning regulations of a piece of land can play an important factor in a lender’s assessment of a land loan. The more central and easily accessible a block of land is, the more likely it is that you will secure a loan.
People seeking to buy a block of land in capital cities or regional centres, and those which are serviced by sealed roads, are typically more likely to secure finance than remote locations that can only be reached by 4WDs.
Zoning regulations are another important factor, so you’ll have to make sure that the land you want a loan for is zoned as residential.
Why do you want a land loan?
Your intention for the property is often one of the most important factors in lenders’ assessment of your loan application.
If a borrower doesn’t intend to build on a vacant block of land in the near future, lenders might view them as a speculative investor, and be more reluctant to lend to them. However, if a borrower can demonstrate clear plans to begin construction within a year or two, they may have a much easier time securing a loan.
A land loan would be more suitable for those in this position, as there is less of a time pressure on when you need to commence building.
If you choose to apply for a land loan, research your options thoroughly and read through the Product Disclosure Statement and terms and conditions of each loan before committing.