Buying Vacant Blocks Can Be Suited By A Tailored ‘Land Loan’

Have you ever driven past a vacant lot of land in your dream location and thought, ‘I’d love to buy that and build a home there’? You might also want to buy vacant land to set up a commercial venture, or to simply sell at a later date for a profit.

What Makes Land Loans Different?

Buying lots of land straight out is a unique area of the real estate market, and the loans are not quite the same as traditional property finance. Lenders tend to view land loans as riskier than traditional home loans, largely due to the potential for fluctuating land prices and the commonly held view that vacant land is harder to sell. To compensate, borrowers can often be faced with larger deposit requirements and higher interest rates on land loans.

Factors Lenders Consider for Land Loans

To determine how much they are prepared to lend, financial institutions will not only take into consideration your own personal finances but will also want to know the physical characteristics of the lot, whether it is registered land, the accessibility, proximity to infrastructure, and your plans for the vacant block.

Land Loans vs. Construction Loans: What’s the Difference?

Land loans allow you to buy vacant land with no immediate requirement to build on that land, which makes them different from construction loans, which do have that requirement. This allows you to snap up an empty lot and let it sit for a period of time until you are ready to build something.

Funds for land loans are released all at once, as opposed to construction loans, which get released in stages as the property gets built and you only pay interest on the money that has been drawn down during each stage. For this reason, if you buy a vacant block and plan to build on it relatively soon, a construction loan may be more suitable. However, if you do not have any immediate plans to build or plan to decide what to do with the empty lot in the future, then a land loan would likely suit more, one that you can swap for a construction loan once your decision is made.

Pros and Cons of Land Loans

Land Loan Benefits

  • Empty land has low maintenance costs
  • Options – empty land is a world of possibility that you can choose what to do with
  • Lower stamp duty

Land Loan Drawbacks

  • Harder to get from lenders who might only want to provide funds if you intend to build
  • Fluctuating land prices
  • No rental income
  • Costs associated with preparing the empty land so it is suitable to build on
More

News & Resources