Rural home loans

If you’re hankering for a tree change with lots of land to call your own, a rural home loan could be the solution that lets you own your own country acreage.

But the loan process can work slightly differently compared to suburban mortgages, and it’s worth understanding the basics of rural home loans if you plan to ‘go bush’.

How do rural home loans work?

Lenders can have different policies for rural home loans compared to loans for metropolitan properties – and a lot can hinge on the size of the property, according to Jason Puxty, a Mortgage Choice broker based in the regional city of Orange, NSW.

“There is a view that larger properties carry a higher risk because there may be less demand for them,” said Mr Puxty.

“If you default on the loan, and the lender has to sell the property, there may be a slower turnaround time on the sale.

“Over the last few years, I have seen little evidence of this, with very strong demand for rural properties. However, not all lenders have updated their policies.”

Mr Puxty said some lenders were happy to offer finance for properties up to 100 hectares, but many would draw the line at 10 hectares for residential lending – some won’t even go over three hectares.

Remember, one hectare is about 2.5 acres and the average size of a city block is slowly shrinking to about 467 square metres, so one acre is about eight city blocks.

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

For residential lending, Mr Puxty said lenders generally have the same criteria for both rural properties and suburban homes. A notable difference can lie with the loan to value ratio (LVR) limits that lenders have in place for rural home loans.

The LVR is the percentage of your home’s value you need to borrow. As a guide, if you plan to buy a small hobby farm costing $800,000 with a deposit of $160,000 (20% of the purchase price), you would need a rural home loan of $640,000, meaning an LVR of 80%.

The maximum LVR offered by your potential lender for a rural home loan should be something to check before committing to buy a property. It can shape the size of the deposit you need to secure finance.

Mr Puxty said for rural home loans, the LVRs generally vary between 60% to 95% depending on the lender. A 60% LVR would mean you’d need to have a 40% deposit.

All this assumes a property is classified as ‘residential’ by a lender, and that may not always be the case.

Mr Puxty said properties that generate income, or have no building entitlement, or which exceed the lender’s maximum hectare size, may not be regarded as residential.

If that’s the case, the property could be subject to significantly different lending criteria, and a commercial or ‘agribusiness’ loan may be needed to finance the property.

Are interest rates higher for rural home loans?

As with any home loan, it’s important to factor in how much interest you’ll be paying.

“If the land is considered suitable for a residential loan, then standard lender residential interest rates will generally apply,” said Mr Puxty.

Of course, interest rates can vary considerably between lenders, so it is always worth shopping around for a home loan.

If you need an agribusiness or commercial loan to buy a property you could be looking at paying a much higher interest rate.

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: Nils Versemann/Shutterstock.com