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Using Your Land Equity To Build

Are you planning on buying vacant land to build? Do you need a land equity construction loan?

You may be able to use the equity in your land as a deposit for a construction loan but which lenders accept it?

Can banks consider land equity on a construction loan?

Yes, some lenders can consider up to 80% of your land equity for a construction loan.

You’ll need to provide the lender with a valuation of the land (at your own cost) and mention how long ago you purchased it.

If you have a valuation already, lenders may still require another valuation depending on how recently it was done.

How much can I borrow for a construction loan?

You may be able to borrow up to:

If you want to borrow 100% of the land and construction costs, you’ll need the help of a guarantor.

A land equity construction loan that involves a guarantor can be complex and result in delays and errors with most lenders.

Luckily, we have mortgage brokers who specialise in guarantor home loans as well as construction loans.

We can help you select the right lender for your situation and can structure your loan so you can build your new home without much hassle.

Please speak with one of our credit specialists by calling us on 1300 889 743. You can also complete our free online assessment form and one of us will contact you instead.

What are the risks involved?

With a land equity construction loan, your borrowing power is the main element that’s at risk.

Banks use the valuation figure of the land value plus the cost of construction as the total purchase value. This means that the amount you can borrow depends a lot on the land valuation.

For instance, let’s assume you’re planning on building on land that you already own, which is valued at $80,000. You work out that the cost of construction is going to be $300,000 and you need to borrow $350,000.

Since the total purchase price will be the land value ($80,000) plus the costs of construction ($300,000), or $380,000, you would actually need to borrow at 92% Loan to Value Ratio ($350,000 / $380,000 x 100%).

If the land value is higher, for example $90,000, the total purchase price becomes $390,000 dropping your loan amount to 89% LVR.

In this way, you can not only get approved with more lenders but you can also save thousands of dollars on Lenders Mortgage Insurance (LMI), which increases sharply if you go over 90% LVR.

If the land value is lower, for example $70,000, the total purchase value becomes $370,000 increasing your loan amount to almost 95% LVR. This means you’ll need to come up with several thousands of dollars more to complete the purchase.

Should I invest all of my savings into land?

If you’re planning to build on land you already own then you can put all of your savings into the land and build.

This is because you can increase the land value by investing more on it and also take out a land equity construction loan when you build.

If you’re buying land and you have no intention to build within 12 months of settlement, it may be a better option to hold onto your savings since they are much easier to access than equity.

When purchasing land, you need to meet the following requirements to ensure you’ll be able to access the equity at a later stage:

  • Location: It’s important to choose a location that is either in a major city or town or at least close to one.
  • Services: The land must be connected to the electricity grid and have access to town water or tank water as well as sewerage services.
  • Size: The land must be no larger than 50 hectares. Only a select few lenders may be able to lend for land sizes larger than this.
  • Access: There needs to be easy access to the land via a road. As long as it’s well maintained, dirt roads are usually ok.

Disclaimer: The above must not be taken as financial advice. Please speak with a professional financial advisor before you make a decision.

Do you need a land equity construction loan?

Our credit specialists have many years of experience in the mortgage industry. We have mortgage brokers who have dealt with numerous construction loan situations including using land equity to build.

You can discuss your situation and loan needs with one of our mortgage brokers by calling us on 1300 889 743. If you’d like one of us to contact you instead, you can enquire online and we’ll get back to you in 24 hours.

  • S. Neil

    I was preapproved for a construction loan a while back, and my lender said that they can accept 60% of the equity I had in land I owned. Now my preapproval has been withdrawn! Why is it so hard to get a good preapproval?

  • Hi S. Neil,

    Sorry to hear that but there are several reasons why your preapproval may have been withdrawn. It could be that the preapproval was unreliable from the start, e.g. it was an on the spot approval and didn’t actually go to the bank’s credit department. The LMI provider could also have declined your loan. If your situation or the lender’s policy has changed then that too could have been the reason.

    Please call us on 1300 889 743 to directly discuss your situation and details with one of our mortgage brokers and find out how we can help.

  • Lucy

    I am looking at getting $500,000 as a payout figure from my husband from my current house. I was hoping to buy a block of land worth $560,000 and build and move in around 24 months later. During this time I would pay my husband rent for living in the house that I once jointly owned. Do you think I would be able to get a $350,000 loan on my own to pay for the build? I have two childen and my base income is $85,000.

  • Hi Lucy,

    We’d have to do a full assessment to be sure, however indicatively yes this looks viable. You have plenty of equity and also your income looks sufficient assuming you have no other liabilities. If you receive income such as Family Tax Beneifts A&B or child support then some lenders can consider this as well depending on the age of your children

  • Lucy

    Thank you kindly.

  • Sandy

    Hi, We own our land (valued at $290,000) and we are currently building a house on it. So far we have spent $190,000 on it but we are now $80,000 short to finish. Is there a bank that would lend us the money? We have an owner builders license and have income to cover the $80,000 loan.

  • Hi Sandy,
    A partially complete home that does not have a licenced builder is almost impossible to finance. We have some private lenders that may consider lending 70% of the property value as it is now. They’re very expensive so if you can borrow off of a family member instead then this is much better. Potentially they could borrow on their home and lend it to you to complete your project.

  • Sandy

    Not even an equity loan?

  • Sorry my mistake, yes if your land if unencumbered (no loan) then yes we can assist with this. It’s still an exception to lending policy but it’s likely we can help.

  • Ben

    I own land worth approx $600,000. I’m looking to build 2 townhouses with the build costing approx $700,000 (for both townhouses). Therefore, I’m looking to borrow $700,000 as a construction loan for 1 year while the build happens, then repay the full amount after the sale after 1 year.
    Can I get approval for this $700,000 loan based solely (or the majority) on the value of the land and/or the potential value of the 2 completed townhouses? Or will my income always come into the assessment for the loan?

  • Hi Ben,
    Your project falls in between residential and commercial from the point of view of the banks. It would tend to be more in the residential department which relies on your income to confirm you can afford the loan.

    If you have sufficient equity we could get a small development loan. FYI the major banks are not interested in development loans at the moment so if you can get the loan approved as a home loan you’ll find it much easier and cheaper.

  • Fogler

    Hi, I bought a piece of land at $600,000 and my bank valued it at $550,000. I want to construct now so will my bank use the lower valuation?

  • Hey there, your bank will use the new valuation if it has been over 3 months since the last valuation.

  • Stephanie Lindsay

    I purchased land for $285,000 paying 10% deposit on purchase of $28,500… My land is still not registered and it has gone up in value by at least $80,000 i have been advised. I will get a proper valuation once it is registered. However what i want to know is, if it has gone up in value $80,000 but the time it is registered, can i use some of the equity to build a $300,000 home on the land???

  • Hi Stephanie,
    Yes if the land has gone up in value then you can rely on the increased valuation to enable you to borrow more when you build. Assuming of course that your income can support it. This is similar to the lending policy for off the plan units where some of our lenders will use the valuation not the purchase price to work out how much you can borrow as long as it is some time between buying and settlement.

    Look at other blocks of land sold recently in the same sub-division as they are the most comparable sales and can let you know accurately what your land is now worth.

    We can get valuations with more than one lender and can then proceed with the lender that has the most favourable valuation