Laying The Foundations: Can You Get a Loan to Buy Bare Land?
Are you dreaming of owning your own slice of Kiwi paradise? If you’re considering buying land to build on, you might be wondering about your financing options. In this week’s update, I’ll walk you through the essentials of land mortgages helping you to understand the unique aspects of financing undeveloped property.?
Types of Land Mortgages?
When it comes to buying land in NZ, there are a few different mortgage options available:
Vacant Land Loans: These are specifically for purchasing undeveloped land with no immediate plans to build.
Construction Loans: If you’re planning to build on the land soon after purchase, this type of loan covers both the land purchase and the construction costs.
Rural Land Loans: For larger plots or farmland, these loans are tailored to the unique needs of rural properties.
Each type of land loan comes with its own terms and conditions, so it’s important to choose the one that best fits your plans for the property. This is where working with an experienced Mortgage Adviser will help to save you time and ultimately money, by guiding you in the right direction.
Financial Requirements and Considerations
Securing a mortgage for land often requires a larger deposit compared to standard home loans. Here’s what you need to know:
Deposit: Typically, you’ll need a deposit of 20-50% of the land’s value, depending on the lender and the type of land (i.e if it already has services on site or not).
Income: Lenders will assess your income to ensure you can manage the repayments.
Credit Score: A good credit history is important for loan approval.
Land Valuation: The lender will require a professional valuation of the land in most cases.
It’s important to note that lenders may have stricter criteria for land loans compared to standard home mortgages due to the perceived higher risk. Remember, every situation is unique, and we’re here to help you navigate these requirements.
Understanding Construction Loans for Land Purchase and Building
A construction loan can be an excellent option for those looking to buy land and build a home. These loans typically cover both the land purchase and the cost of building. Here’s how they usually work:
Building a home often involves a different process than a standard mortgage, typically with staged payments as construction progresses. This can be advantageous as you’re not paying interest on the full loan amount from day one.
The type of construction contract you choose will also have an important part to play when it comes time to determine how much you can borrow, so let's take a look at the common types of construction contracts and how the finance works:
Turn-Key Contract
As the name suggests, a Turn-Key contract means that you won’t pay for your new home until the property is completed, settled and ready for you to “turn the key” in the door.
You normally pay an initial deposit and when your home is ready and has its code of compliance certificate, you can draw down the rest of the funds to pay the building company, take legal ownership and move in.
The benefit to this type of contract is that you don't pay any interest until the loan is drawn down, which is once it's complete and ready to move in. This can really help if you are having to pay rent or another mortgage on your existing home while the property is being built.
Fixed Price Contract
If you have bought your land upfront and are employing a builder to construct your new home on it, you will usually have a fixed price contract in place.
Fixed price contracts are “all inclusive” and will set out a schedule of progress payments which you pay when your project reaches certain milestones, like when the earth works are complete, framing is up, the roof is on and of course when the project is complete.
The bank will need a registered valuation at the beginning of the project and a registered valuer’s completion certificate when the work is finished. Normally when the builder invoices for a progress payment, the bank will want to see an updated progress report from the valuer. This report is generally one page and will tell the bank what the property is currently worth and what the cost is to complete. The bank will then pay the funds out to you or the builder.
Something to be aware of with progress payments is that you start paying interest on your loan as soon as the first payment is drawn down, so as each of the progress payments are made, your loan repayments will increase. This will need to be accounted for if you are renting or paying another mortgage while your home is being built. The bank will also want to see proof of your ability to service both financial obligations at the same time, so working with an experienced Mortgage Adviser is essential here.
Labour Only / Partial Contract
With a labour-only or partial contract you will need a much larger deposit. These types of contracts involve a range of sub-contracts managed by you or a project manager. You will also need to supply quotes for all materials and subcontractors upfront.
A valuation will be required for each drawdown of funds to ensure that the project is tracking as intended and will help identify any cost overruns early.? These types of building contracts are best suited to those already experienced with building a new home and are limited to the land value only, unless the buildings are already permanently fixed to the land.
Important: When you’re signing a building contract, be sure to talk to a lawyer and a Mortgage Adviser first. Your lawyer can check that the contract is fair and doesn’t have any hidden surprises or risks. An experienced Mortgage Adviser can check that the contract will work with the lender's criteria and with your available funds. That way you can be sure everything’s in order before committing.
How long is your finance offer valid for?
It takes a long time to build a house. Most banks will allow up to 12 months to draw down your entire loan before they need to reassess things, so it's really important to keep in touch with your Mortgage Adviser throughout the entire build process just in case this timeline blows out.
As you can see, obtaining a land mortgage is definitely possible, but it requires careful planning and understanding of the unique aspects involved. Whether you’re buying vacant land, planning to build, or looking at a rural property - a Mortgage Adviser will help you to determine which lender might be the best fit for your situation.
Feel free to reach out if you need a hand!
Rodney,
?? 0274 555 863