Rural home loans

How do rural home loans work?

Rural home loans work in much the same way as standard home loans, in that you will pay a deposit to purchase a property, and then repay the loan over time, along with interest. A key difference when buying rural property can be in the loan to value ratio or LVR – this essentially means that, the larger the property, the larger the deposit size you will need in order to purchase it.

Banks and lenders may view rural properties as riskier than metropolitan ones, partly because of the perception that there is less demand for them. If you are unable to make your mortgage payments and default on your loan, your lender will generally sell the property to recoup their costs, and if a rural property takes longer to sell than a suburban home, then the lender is exposed to more risk.

For this reason, the terms of a rural home loan – and the limits to how much you can borrow – may be stricter.

How much deposit do I need for a rural home loan?

According to Home Loan Experts, the size of the property is one of the main determining factors in how much you can borrow when purchasing a property in the country. As a rough guide, and subject to the property itself as well as your own finances:

• Up to 10 hectares: You may be able to borrow up to 95% of the value, meaning you’d need at least a 5% deposit.
• Up to 50 hectares: You may be able to borrow up to 90% of the value if the property is near a major town centre, or 80% if it’s further away, meaning you’d need at least a 10% – 20% deposit.
• Up to 60 hectares: You may be able to borrow up to 80% of the value, meaning you’d need at least a 20% deposit.
• Up to 100 hectares: You may be able to borrow up to 70% – 80% of the value, meaning you’d need at least a 20% – 20% deposit, depending on the property, your finances and the lender’s discretion.
• Over 100 hectares: Banks and lenders may see larger rural properties as “income producing”, meaning you could be subject to commercial lending criteria, even if your only intention is to live on the property, so at this level, it may be wise to consult an expert mortgage broker.

If you plan on purchasing a property to use as a commercial farm, you may be limited to borrowing 60% of the property’s value, meaning you would need a 40% deposit to purchase.

Are interest rates higher for rural home loans?

While the deposit requirements may be stricter for a rural property, the interest rate you’ll end up paying may well be comparable to a standard residential home loan. Mortgage broker Jason Puxty told Canstar that if the land is considered suitable for a residential loan, then standard lender residential interest rates will generally apply.

That said, interest rates can vary considerably between lenders, so it is always worth shopping around for a home loan. Likewise, if you need an agribusiness or commercial loan to buy a property, then the interest rate could well be higher than for a standard residential loan.

How will a lender value a property for a rural home loan?

As part of the home loan process, all lenders will conduct a property valuation. This gives the bank confidence that the property offers adequate security for your loan.

When it comes to a home in the suburbs, your lender may opt for a desktop valuation, which as the name suggests doesn’t involve a physical inspection of the property. It usually involves comparing values of surrounding or similar properties in the area using databases provided by property research companies.

For rural home loans, especially those involving larger acreage, Mr Puxty said lenders are more likely to conduct a full valuation, where a property valuer visits the place in person.

To pass muster for a loan, he said lenders may also require features such as access from a bitumen or all-weather road. Some lenders may want to see that the property is connected to the electricity grid, and others may require access to town water.

“To fall under residential lending, the property needs to be a ‘rural lifestyle’ block,” said Mr Puxty.

While things such as orchards or shearing sheds were not an automatic bar to a rural home loan, it can depend on whether the valuer thinks the land is being used to run a commercial business.

If that’s the case, Mr Puxty said the lender may not proceed with a residential loan, and you may be left looking at other finance options such as a business loan.

What to be aware of with a rural home loan?

As a property’s size can be a key decider in qualifying for a rural home loan, it’s important to consider the maximum size landholding your lender will lend against.

Mr Puxty said it may be a good idea to have your loan pre-approved before making an offer, but be mindful that a valuation will ultimately be a determining factor in the lender accepting the property as security for the loan.

The upshot is that a rural home loan may help you to achieve a personal goal of buying acreage, though you may have to jump through a few extra hoops compared to a regular mortgage.

Given the potential complexities, it might be worth speaking to a mortgage broker or lender with experience in a rural setting before you sign on the dotted line to buy your slice of country living.

Cover image source: Anna Averianova/Shutterstock.com