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Considering a land purchase? Raising funds for buying land is not as easy as you might think; rather, it is more complex than getting residential loans. Land loans allow you to buy or refinance land. In this comprehensive guide, we will investigate land loans, how they work, types of land loans, pros and cons of land loans, and alternate land financing options.
A land loan is a special financing option for purchasing land, securing a plot for generating profit, or refinancing land. Land finance is considered risky as compared to residential mortgages because it is harder to sell land than property. It is difficult to secure finance against agricultural land specifically because it lacks basic facilities like gas, electricity, and water supply, or can be registered as a green belt.
There might be varied intentions for purchasing land; land loans also vary according to land usage. Land loans are of several types; these include:
Bridging finance is a short-term loan that can be arranged temporarily for purchasing or refinancing until a long-term loan, or permanent finance is available.
Bridging finance offers a Loan to Value (LTV) of 65% or a maximum of 70%, meaning there is a deposit requirement of 30-35%. The interest rates start from 0.75% per month.
Bridging is a quick funding solution; it is an ideal option for those looking to raise finance against land quickly. You can secure the loan in as little as 24-48 hours or a maximum of 7-21 days.
Like Bridging Finance, Planning gain finance is also short-term. Bridging finance and planning gain finance both work on the same principle for land purchase. The difference between both is that planning gain finance is specifically used to finance land while it is taken through the planning permission process.
The maximum Loan to Value (LTV) approved for planning gain finance is up to 80%, meaning the borrower is supposed to put down a minimum deposit of 20%. If you are financing land through planning gain finance, the minimum interest rate is around 0.75%; this rate is variable, depending on how likely the land is to secure planning permission.
These loans are long-term mortgages to finance land. Agricultural loans are specifically formulated for purchasing or making improvements in farmland, farm, buildings, and the land that will be farmed.
People buy farmland to start a farming business, or some want to be self-sufficient in keeping animals and growing food.
Loans for agricultural land are risky; therefore, a huge deposit, usually between 20-50%, needs to be there to increase the chances of loan approval. Agricultural loan approval can be a success if you provide evidence of high income, excellent credit score, and proof of planning permission on land.
Agricultural mortgages can be secured from high street banks such as Barclays or RBS. These long-term mortgages are usually available for up to 30 years. The maximum Loan-to-Value (LTV) approved for Agricultural mortgages is 75% LTV, meaning the borrower has to put down a 25% deposit. The interest rates on this LTV start from 2.25% per year. The agricultural mortgage is the best option if you want to finance land that will be farmed over the long term.
Property development finance is secured for the construction/development of property on land. This finance is granted during the construction phase and is usually refinanced to alternative types of finance once construction is complete. Usually, buy-to-let mortgages are offered if the property is to be let, or development exit finance if the property is to be sold.
A property development loan is granted against the land having planning permissions in place by the time the loan is made. With this loan, LTV of up to 65% of the land value and 100% of building costs are offered. Experienced developers or investors may get additional LTV. Interest rates on property development finance usually range from 6.5-9%.
Self-build mortgages, as the name signifies, are granted for building a property yourself. This loan is offered in stages (as the construction goes), not in one lump sum. This is to ensure that the funds are spent as planned and avoid any risks.
Many people buy land to build a house to live in. standard residential mortgage will be denied as the property does not exist yet; therefore, you will have to apply for a self-build mortgage option.
Funds are granted in the following stages:
If you have a plot of land and are considering building commercial property, you can avail commercial mortgage to complete this project. A higher deposit of around 50% is usually required with a commercial land mortgage.
Land finance is secured against the land, and interest is charged on the loan. To secure their funds, land finance lenders rely on the value of the land. There is a requirement for land valuation by the lender; based on valuation, a loan for land is granted or rejected.
Land finance is risky as compared to securing a loan against property. Therefore, it is recommended to seek a specialist mortgage broker’s help to avoid risks, and he can help you find an expert lender in this domain.
Different lenders provide different types of land loans, such as planning gain finance, bridging loans for land, and property development finance are offered by specialist land finance lenders or challenger banks. Still, agricultural mortgages are offered by high street banks.
The borrower is supposed to provide personal information, the rationale for taking out land finance, land usage details, the financials, expected building costs, and your experience in land purchase. The borrower must also provide a detailed survey report from a RICS chartered surveyor to the land finance lender. The borrower should be transparent and honest while providing all details otherwise, legal action can be taken against the borrower.
Land loan lending criteria are as under:
While securing a land loan, the most crucial requirement is your deposit. Your chances of securing land finance are higher if you have a sufficient deposit. It is necessary to put down 30% of the land price as a deposit when Loan to Value LTV ratio is 70%.
While taking out a land loan for your primary home; meaning you do not own any other property, the deposit will be represented as savings. If you already own a property, you can leverage the equity on that home to provide an effective deposit on your land purchase.
Planning permission is an agreement from your local planning department. Planning permission makes your proposition viable to lenders. It is valid for five years once it expires, it needs to be renewed. Planning permission is a crucial factor if you are considering taking out loans for land purchases. A land without planning permissions is considered risky as it can affect LTV and the rates on offer. The lenders usually offer a maximum 65% LTV to the borrowers who intend to purchase land without prior planning permission.
The borrower is not solely responsible for getting planning permissions; rather, the land is sometimes sold with already planning permissions in place for a building.
Anybody can access land loans, including individuals, partnerships, offshore borrowers, Ltd Companies, SIPPs, and LLPs.
The loan amount depends on the lender’s LTV requirements; the value of the land you intend to finance also the type of loan you are taking. A land loan can reach millions of pounds against large, valuable sites. Land loans are usually not offered more than 65-75% of the value of the land. Land finance lenders meeting the lender’s LTV requirements usually offer loans from £25,000 with no maximum loan size.
The term duration of the land mortgage depends on the land finance lender and the type of land you intend to purchase. Sometimes the loan term can be short-term, lasting from 2-5 years. It can be longer sometimes for many self-build mortgages and agricultural loans; it can last for up to 25 to 30 years.
The financial condition of the borrower matters a lot when you are applying for land loans. The lender requires excellent credit history, high-income evidence, and a debt management history.
The interest rates on the land loan are higher than a standard residential loan. Interest rates as low as 4% are possible for land-only mortgages. Interest rates depend on the type of land, land usage, credit score, LTV of the Loan, and any additional securities. Interest rates are charged according to the following criteria:
There are fees for taking out land loans; these include:
You are supposed to pay stamp duty or land tax if you purchase land for residential purposes and the land is worth £125,000 or more in England and Northern Ireland.
The rates of stamp duty are usually 2% of the portion of the purchase price between £125,001 and £250,000, 5% between £250,001 and £925,000, 10% between £925,001 and £1,500,000 and 12% for £1,500,001 and above.
The amount of stamp duty when purchasing a house, flat, building or land in the UK can be determined by a stamp duty calculator.
Stamp duty will be different if the property you buy is non-residential such as commercial or agricultural land. It will be paid if the purchase price is more than £150,000. You’ll pay 2% on the portion of the purchase price between £150,001 and £250,000 and 5% on the portion above £250,000.
Land loans are beneficial due to following reasons:
Besides benefits, there are some limitations of land loans; these include:
You can take the following measures to make your loan approval successful.
Your financial condition matters a lot when you intend to take out land finance. The lenders check thoroughly whether you can afford the mortgage or not. So, before applying for a loan, it is better to go through your bank statements and check if you can cut your expenses.
An excellent credit history can increase your chances of loan approval at better interest rates. The credit score is based on information in your credit file by Credit Reference Agencies (CRAs). Lenders, through credit scores, determine how reliable you are as a borrower.
You need to improve your credit score if it is low; it can be improved by spacing out credit applications registering to vote, paying bills on time, and checking for errors on your credit report.
The higher your deposit size, the lower your loan to value (LTV) will be. The lower LTV determines that you are more likely to be accepted for a land mortgage.
You will be considered a high-risk borrower if your deposit size is small; you will have a higher Loan to Value (LTV). Consequently, your loan application will be turned down or the borrowing costs may be higher.
The deposit requirement is usually 20%. The best rates are offered if your deposit size ranges from 40% to 50%.
Your loan request will be considered less risky if you have planning permissions on land in place. Having planning permission in place will let the lender offer you the best rates with a smaller deposit.
Make sure you plan all the details accordingly before applying for land loans. For instance, a detailed financial plan defining the land usage, your projected costs, how you plan to build any properties, and your expected time scales. If you have strong planning, you are more likely to obtain land loans at the most competitive interest rates.
You must gather all the documents before applying for loans, such as business accounts, planning permissions, and bank statements.
There are some alternative options for land purchase; these include:
Financing land is far more complex than applying for a traditional mortgage as certain requirements are to be fulfilled, such as land-use restrictions, planning permissions or surveyed boundaries, etc. Local lenders, seller financing, or a home equity loan can be good options to fund a land purchase.