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:
- 95% of the construction costs: You’ll need to be in a strong position including having a perfect credit history, stable employment with a good income, genuine savings and so on. If you can’t meet these requirements, you may be limited to borrowing 90% instead.
- 85% of the construction costs: You’ll need to prove that you’re a low risk borrower and won’t be borrowing more than $1.5 million.
- 80% of the value of the land plus construction costs: Most banks don’t lend to cost plus building contracts so the key is to apply with the right lender.
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.