How do rural home loans work?
Rural home loans work much the same as standard home loans—you pay a deposit to purchase a property, and then repay the loan over time, along with interest.
A key difference can be in loan-to-value ratio (LVR) limitations. The larger the property, the larger the deposit you might need to purchase it.
Banks and lenders may also view rural properties as riskier than metropolitan ones, partly because of the perception that there is less demand for them.
If you’re unable to make your mortgage payments and default on your loan, your lender will generally sell the property to recoup their costs. But if a rural property takes longer to sell than a suburban home, or can’t command a suitable price, the lender is exposed to a greater risk of not recouping some of all of its money.
Consequently, the terms of a rural home loan, and your borrowing limits, may be stricter.
How much of a deposit do I need for a rural home loan?
According to Home Loan Experts, property size is one of the main factors determining 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% to 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% to 80% of the value, meaning you’d need at least a 20% ]to 30% 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 you only intend to live on the property. 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.
If you’re able to secure a guarantor for your loan, some lenders may permit borrowing up to 100% LVR to purchase a country property.
Are interest rates higher for rural home loans?
While deposit requirements may be stricter for a rural property, a rural home loan’s interest rate 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 generally apply.
That said, interest rates can vary considerably between lenders, so it is always worth comparing home loans.
Likewise, if you need an agribusiness or commercial loan to buy a property, the interest rate could be higher than a standard residential loan’s.
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.
For homes in suburban areas, your lender may opt for a desktop valuation, which doesn’t involve a physical inspection of the property.
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 property in person.
To be approved for a loan, he said lenders may also require features such as access from a bitumen or all-weather road. Some lenders may require the property be connected to the electricity grid, while others may require access to town water.
“To fall under residential lending, the property needs to be a ‘rural lifestyle’ block,” said Mr Puxty.
Even if a rural property has an orchard or shearing shed, you may still get a rural home loan, provided the lender doesn't see it as a commercial business.
If that’s the case, Mr Puxty said the lender may not proceed with a residential loan. You may be left looking at other finance options such as a business loan.
What to be aware of with a rural home loan?
It’s extremely 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 determine whether the lender accepts the property as security for the loan.
The upside 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 administrative hoops compared to a regular mortgage.
It might also be worth speaking to a mortgage broker or lender with experience in a rural setting before buying your slice of country living.
Finally, if you’re buying a home on more than two hectares of land, it’s worth being aware it might be subject to different Capital Gains Tax (CGT) arrangements. If you’re unsure, consider reaching out to a tax professional for advice before making up your mind.
