What is a land loan?
A land loan is a type of home loan you can take out to buy vacant land — usually to build a house on it later for yourself or an investment property. That’s why a land loan is often combined with a construction loan. Alternatively, some buyers may purchase a vacant block of land as an investment, to sell in future if the value increases.
If you’re buying land to build on, you’ll generally need to arrange a land loan first and then a construction loan once you’ve found a builder and signed a fixed-price building contract. Some lenders won’t consider land-only loan applications without some building plans in place.
How does a land loan work?
A land loan works like a typical mortgage. You’ll borrow a set amount from a lender for the land purchase, which you’ll repay with interest over a fixed term through regular repayments. The vacant land is used as security for the loan.
When you apply for a vacant land loan, the lender will assess your borrowing capacity, depending on:
- Your deposit (or equity)
- Income (either as a PAYG employee or self-employed individual)
- Living expenses and liabilities (including any outstanding debt)
The size of your deposit (or equity contribution) will determine your loan-to-value ratio (LVR) — what you’re borrowing relative to the land's value. Lower LVRs usually come with lower interest rates, while higher LVRs typically result in higher rates. An LVR above 80% generally requires you to pay lender’s mortgage insurance (LMI).
Land loan LVR requirements & considerations
Lenders may require a lower LVR for a land loan than a standard home loan (which typically allows up to 95% LVR with LMI). That’s because land loans represent a higher risk to the lender. For example, vacant land prices may fluctuate more than house prices, and there’s a possibility that it will take longer to sell vacant land than established homes in the event of a loan default.
Mansour Soltani , Home Loans Expert
“In some cases, lenders ask for an LVR of 70-80% or lower for land loans. Because land loans are riskier for lenders, they’ll ask for more cash security or equity. This makes it harder for first-home buyers to secure a land loan unless they’re using a government grant to top up their cash savings. It’s easier for borrowers with usable equity. But there are specialist lenders that will accept LVRs of up to 90%, plus costs like stamp duty. However, they come with high fees such as risk fees of 1-1.5%”
Mansour Soltani , Home Loans Expert
Loan loan interest rates
Here are some land loan interest rates (variable rates with principal & interest repayments) available from lenders that offer this type of mortgage product.
| Interest rate | Comparison rate^ | Maximum loan-to-value ratio (LVR) | |
|---|---|---|---|
Qudos Bank Variable Loan | 7.14% p.a. variable | 7.18% p.a. | 80% |
ANZ Standard Variable Land Loan | 7.24% p.a. variable | 7.24% p.a. | 80% |
AMP Land Loan | 7.95% p.a. variable | 8.00% p.a. | 90% |
Gateway Bank Variable Loan | 8.68% p.a. variable | 8.75% p.a. | 80% |
What lenders consider when assessing your land loan application
1
Location, location, location
Lenders tend to consider blocks of land in suburban areas or capital cities with supporting infrastructure less risky than rural blocks or vacant land in a regional area with limited roads or utilities. The latter generally has limited resale demand. Lenders will also assess the zoning regulations of your vacant block to ensure it’s zoned for residential use and if there are any restrictions (e.g. it may not allow dual occupancy). Additionally, they may check whether it’s in a flood-prone area or an area prone to bushfires.
2
The shape of the land
Some lenders will consider the shape and orientation of your vacant land, such as if it’s on a narrow block or sloped block which will require a retaining wall or stilt home, for example. That’s because these factors may affect the resale value of the property and demand may be limited for these properties.
3
The size of the land
The size of the block of land will play a big part in determining how much deposit you need for a land mortgage. Some lenders like ANZ or AMP may accept a 10% deposit (of the land’s value) for smaller blocks of vacant land (less than 2 hectares) if you’re a prime borrower. For larger plots of land (usually over 10 hectares), lenders will generally require a 20-30% deposit. That’s because larger blocks of land are considered riskier than smaller parcels. For example, they may have higher maintenance/development costs, and more complex zoning regulations or environmental considerations.
4
Whether the land is registered or unregistered
Mainstream lenders generally won’t approve loan applications for unregistered land as it can’t be built on or may not have services connected to it. Many new estates or land releases start as undeveloped land. Developers generally sell the unregistered land and take deposits before it’s registered for subdivision. On the other hand, registered land has a property title that allows you to own and build on the land. It also has its services connected and road infrastructure complete.
5
Whether you plan to build on the land
According to Mansour Soltani, Money.com.au's expert on home loans, some lenders won’t approve your land loan application unless you have plans to build within the next 1-2 years or have a building contract. Lenders consider applications where there are no plans for construction as being riskier.
6
Intended use of the land
The land where construction is planned must be designated for residential or investment use, not for farming. Although, you might be able to run a small-scale hobby farm that generates a little income.
Are you required to build if you take out a land loan?
Mansour Soltani , Home Loans Expert
“Most lenders don’t like to give out land loans without a purpose, and some won’t approve your land loan without a building contract or plans that show your intention to build. So, if you’re a borrower hoping to ‘land bank’ to make a profit by reselling the land in a few years, then think again. Some lenders may allow it, but generally for borrowers with an LVR below 65%, so those with some equity already.”
Mansour Soltani , Home Loans Expert
Land loan vs construction loan: What’s the difference?
Land loan
- A land loan is a mortgage you can take out to buy a vacant block of land when there’s no building contract in place yet. For instance, when purchasing a house and land package, you'll require separate loans for the land and the construction.
With a land loan, the funds are released as a lump sum, and you, therefore, pay interest on the full loan amount.
If you expect the land you're buying will remain vacant for a while or if you plan to hold and resell it for a profit in the future, a land loan may be suitable. Speak to a mortgage broker about your options.
Construction loan
A construction loan (which requires a building contract) is used to finance the building of a residential or investment property or for major renovations to an established home.
A construction loan is paid out in stages, where you progressively draw down on the loan throughout the construction process. With a construction loan, you’ll only pay interest on the portion you draw down during construction and on the full loan amount when the build is complete.
If you’re eyeing off a block of land with plans to build a house, then a construction loan may be suitable. Keep in mind that most lenders require you to build within a specific period (usually within 24 months).
Pros & cons of buying vacant land
Pros
- Vacant land generally has lower ongoing maintenance costs than established homes (since everything is new)
- You get to choose what you do with the land, whether you build your dream house, apply for development or resell it for a profit
- Buying vacant lands gives you more control over how your house is built, as you’ll generally be able to choose your floor plan, fixtures, etc
- When you buy land to build on, you only pay stamp duty on the value of the land (and nothing on the cost of the construction), according to Mark Chapman, Director of Tax Communication at H&R Block
Cons
- Buying vacant land to build on can come with project delays & unexpected costs (e.g. soil tests, contour surveys, landscaping)
- Land values can be unpredictable and may fluctuate due to economic conditions, zoning changes, or other factors
- Vacant land does not generate rental income until there’s a building on it, as opposed to an established home which could earn you an income immediately
- Land-only loans typically have stricter eligibility criteria and are not offered by all lenders
How to compare land loans
1
Look at the interest rate & comparison rate
The interest rate shows the interest on your land loan as a percentage (excluding fees). Legally, lenders must also display the comparison rate which is designed to give you a more accurate picture of your borrowing costs — including interest and fees. However, the comparison rate is always calculated by lenders based on a $150,000 loan amount and a 25-year term, which doesn’t represent all borrowers.
2
Compare lenders based on your estimated LVR
When comparing lenders for land loans, it's important to consider your estimated LVR based on your budget for land and your available deposit or equity. Since lenders have different LVR limits for land loans, you may find that lender A offers better rates or terms based on your LVR compared to lender B.
3
Compare land loan features
A land loan works like a typical mortgage and generally has features that can help you save on interest and shave years off your home loan. When considering different land loan options, look for an offset account, additional repayments option, and redraw facility. Just keep in mind that some home loan features come with fees. Make sure to weigh up fees against the benefits the feature provides.
4
Watch out for land loan fees
Lenders generally charge standard fees to open and maintain your land loan account and additional fees like an annual package fee, late payment fees, etc. You can often negotiate with your lender to waive some of these. If you take out a construction loan when you’re ready to build, there may be additional fees like drawdown fees each time you make a progress payment during construction.
How to apply for a land loan
The land loan application process is similar to that of other types of mortgages:
1. Complete the lender’s home loan application form
You’ll be asked to provide information about the land you want to buy (including its size and postcode), your finances, and your deposit or equity (if you’re refinancing). A lending specialist may call you to discuss your application and the fine print. If you’re working with a mortgage broker, they will handle the application process on your behalf from start to finish.
2. Submit your supporting documents
If you meet the lender’s eligibility criteria and there are no unusual circumstances, you’ll be asked to submit your income documentation (e.g. payslips, tax returns), and a contract of sale for the land (if you already have one). Some lenders will also require a fixed-price building contract or some building plans that show your intent to build on the land.
3. The lender will conduct a credit check
Your lender will conduct a credit check with one of Australia’s main credit reporting agencies like Equifax or Experian. They will review your credit history (paying particular attention to late payments or defaults), and your existing debts.
4. Get pre-approval
Once the lender has assessed your application, credit profile, and likely LVR, they may grant you pre-approval. Your pre-approval letter will outline your maximum loan amount and interest rate. Keep in mind that pre-approval is not a guarantee your loan will be fully approved.
5. The lender will order a land valuation
Once you have a signed contract to purchase, the lender will order a valuation of the land to determine your LVR. This will generally involve a physical inspection by an independent valuer, according to ANZ. A lender can only value registered land.
6. Get unconditional approval
If the valuation is satisfactory and your financial situation hasn’t changed, you may be granted unconditional approval to seal the deal on your land purchase. The lender will issue you a formal loan offer detailing the terms and conditions of the loan, including your rate. Review the loan offer in detail with your conveyancer and sign it if you accept the terms.
