Land Purchase and Construction

When looking to take out a home loan for land purchases, the size of the land is important as it will determine the deposit needed to get the funds. 

These limits can vary depending on the lender, you could borrow up to 95% of the property’s value if the land is up to 11 hectares. Whereas if you are looking to purchase a block of land larger than this you will usually need at least a 20% deposit. 

Where the land you are looking to purchase is located is an important factor that will go into securing your funds as the access and zoning regulations will become a part of the assessment process. 

For example a block of land in a capital city or regional centre that is serviced by sealed roads may be viewed favourably over land in remote locations with no proper road access for standard vehicles. The zoning regulations of your block of land are important as you need to ensure that the land is zoned for residential use.

When buying a block of land, it is important to understand if the land you are interested in is registered or not, as lender’s will not approve funds on unregistered land. Registered land means it is ready for you to build your home once you own the land as all services are connected and road infrastructure is complete.

While you don't need immediate plans to build on your land to receive a land loan, having the intent to build can assist in securing the funds. This is due to lenders viewing no intention to build at all a higher risk than a borrower who would be planning to build within a few years of owning the land. 

It is important to note that to get a vacant land loan as a home loan, the land and eventual property will need to be used for personal or investment purposes and not as a farm. In some cases you may be able to use your land as a hobby farm, that generates little income from the farm production. 

From time to time homebuyers have been given Government incentives to enter the property market and considerable incentive given mainly around building your own home.

Both the Federal Government and various State Governments have launched various stimulus packages on the back of COVID-19. The measures were meant to boost the building industry and it led to a boom for owners of vacant land in many states.

According to the Australian Bureau of Statistics (ABS), construction of new dwellings

• The seasonally adjusted estimate for the total number of dwelling units commenced rose 18.6%.
• New private sector house commencements rose 26.6% to 33,761 dwellings.
• New private sector other residential commencements rose 4.1% to 16,049 dwellings.
• The value of total building work done rose 0.1% to $29.4b

spiked by 18.6% in April 2021 and in conjunction with record low interest rates, has been a major factor in boosting the confidence quickly returning to the housing market.

With the Government launching Home Builder in particular, many homebuyers have clearly chosen to build  or doing major renovation and that has forced them to get a construction loan.

While many of the Government programs are now coming to an end, many first home buyer grants are available for those looking to build, so it is important to understand how construction finance work

Construction loans are put in place to help with funding the building of a new home or undertaking a substantial renovation. The actual process differs slightly to a traditional loan, as well as the assessment of the loan application.

Because the home is not built yet, valuers will be required to estimate what a fully finished home might be worth. At the same time, given the shorter timeframe associated with building compared to a more traditional 30-year mortgage, the interest rates attached to a construction loan is going to be slightly higher.

A construction loan also differs from a traditional loan, in that it is normally only an interest only loan for the period that the home is being built. Notably, this is broken down into what is known as progress payments as the construction work moves forward and is based on a number of different stages of the build.

• First Stage – This is known as the slab down or base, which covers the costs of laying the home’s foundations.
• Second Stage – After the foundations are in place, the frame is assembled, and this stage is therefore known as the frame stage. This also includes roofing and brickwork.
• Third Stage – Lockup occurs when the house can be physically locked. This means it is finished with the external walls and has windows and doors in place.
• Fourth Stage – The fit-out stage is when the internals of the house are undertaken. This includes cupboards, shelving, tiling and flooring, as well as plumbing and electrical work.
• Fifth Stage – Practical completion occurs when all the finishing touches are done, which includes painting, carpeting, installing fences, gardens and giving the property a final clean.

At the completion of the property, a construction loan will generally revert to a standard principal and interest loan, or the homeowner will likely refinance to a loan product that suits their needs. As mentioned, interest is charged only on the total amount of money that has been drawdown based on the various stage of the construction.