How do banks assess lifestyle blocks?
Around one in five Australians live in inner regional areas and one in ten live in outer regional areas and this figure is expected to grow as more Aussies escape the rat race.
Unfortunately, not all lenders will approve an acreage loan if the block of land is more than 10 hectares or you intend to generate income through farming and commercial activity.
As with all types of property, banks are mainly concerned about the “marketability” of the property so location will affect your eligiblity for approval.
Banks want to ensure that the rural acreage can be easily sold in the event that you default on your mortgage so they can recoup their losses.
Please fill in our free assessment form or call us on 1300 889 743 and we can let you know if you qualify for an acreage loan.
Why is it better to go for a residential loan?
At its very basic, an acreage property will be considered a residential purchase as long as you’re not intending on generating a sole source of income through raising and selling livestock, selling crops or any other farming activities.
That’s great news for you because you can avoid the higher interest rates that come with commercial loans.
Acreage properties are mainly bought for recreational use and lifestyle which is the reason while they’re sometimes to referred to as “hobby” farms.
However, you may still have an opportunity to generate a bit of return from the property through small-scale farming.
One of our banks defines an acreage property as solely for the purpose of “private residential occupation”.
Another lender goes a little further and says that once the property is able to produce sufficient income to meet operating expenses and sustain the farm, it will no longer be considered a lifestyle block.
It’s important to be aware of this because when bank valuers are sent out to inspect the hobby farm, they will value it based on the land and residence value alone.
They won’t include the income-producing potential of the land, sheds, machinery, orchards and livestock.
That means the final valuation figure may come in a lot less than what the vendor (seller) is asking, especially if they’ve used the land for income-producing purposes in the past.
However, if you have a 20% deposit and you can evidence that you’re not relying on income from the farm, you may be able to qualify for a much cheaper residential home loan instead.
The thin line between commercial farm and lifestyle block
There is no hard and fast rule.
It’s not uncommon for owners of acreage to have a couple of cows, horses, chickens and even a small veggie patch.
The trick to getting approved for an acreage loan at residential rates is showing the lender evidence that these farming activities are for personal use and consumption only.
Banks and valuers tend to follow five rules:
- The property will realistically generate no more than $20,000 in gross income from agricultural activities.
- You don’t intend to develop the property for significant agricultural activities.
- The value of the property carrying on a business is less than $500,000.
- The business has not produced a taxable profit in 3 of the last 5 years including the current year.
- You’re not relying on any potential farming income to prove that you can afford the acreage loan.
Based on the above, banks characterise properties by what the valuers identify.
Definition of a residential acreage
- A standard house, liveable shed or vacant land,
- A small orchard that isn’t income-producing,
- A few heads of cattle or horses,
- A small workshop,
- A dam,
- Several paddocks and some bushland.
Definition of a commercial acreage
- May or may not have a house,
- Large crop plantations,
- Dairy farms,
- Commercial orchards with thousands of trees,
- Several cabins or tourism-style accommodation,
- Several heads of cattle,
- Signs of other agricultural activities.
We can help!
We can help you qualify for much sharper residential interest rates on your acreage loan.
It’s all about choosing the lender so tell us about the property you’re looking to buy by filling in our free assessment form today.
What do banks look for in a residential acreage?
If the bank determines that the acreage is not being purchased for commercial farming purposes, they will generally take into account the following:
For most banks, they will only accept land up to 10-15 hectares (ha) in size.
Other banks may be willing to accept land up to 50ha or some won’t have any land restrictions at all if you can show that you’re not undertaking large-scale farming.
The only exception is for land over 200 hectares where banks can be conservative across the board.
Remote locations can sometimes be difficult to finance because, again, banks take a conservative approach to property that has limited market appeal.
Try the postcode calculator to find out if there are any potential lending restrictions for the location you want to purchase in.
Banks prefer properties with easy access and all-weather roads.
They don’t necessarily have to be sealed.
Dirt roads may acceptable as long as they’re in good condition.
When it comes to electricity, water and sewerage connections, partially-serviced acreage may be accepted.
It all comes down to the costs involved in having to bring the property back up to a marketable standard.
For example, tank water and septic tanks may be acceptable to some lenders in favour of having town water and sewerage connected.
Similarly, acreage with solar power will sometimes be accepted if the property isn’t connected or is at least within range of the electricity grid.
Although the names vary from state to state and even council to council, land is generally divided into rural, rural residential or farming or primary production.
The latter zoning means the property will most likely be assessed as a commercial loan application.
A good rule of thumb is that if the land you’re buying is subject to GST then it would be considered as a commercial property by the banks.
What if I want to buy a farm?
If you’re planning to go the whole hog and live and work off the land, we may be able to help you there as well.
Just don’t go quitting your job yet!
By going down the commercial farm loan path, the interest rates will be higher and you’ll need a slightly bigger deposit
You’ll also need to provide some sort of business plan that shows how you intend to run successfully.
Head on over to the farm loans page to get a better understanding of what the banks are looking for in an application, what to look for in a property and tips for running a farm.
If you need a farm loan, call us on 1300 889 743 or complete our free assessment form.
Are you a sophisticated investor?
If you’re looking for a way to rapidly grow your investment portfolio, land banking acreage property can be one way to do it.
The trick is being across upcoming zoning and planning changes with the local council.
New rules that allow for land subdivision or commercial developments can be highly lucractive.
Obviously, there is a high risk with landing banking so you should seek independent financial advice before making a decision.
How to avoid commercial rates
You may still be hit with a high commercial interest rate even if you have no business intent.
It’s all based on the valuation report.
Valuers will take into account highest and best which means they look at the potential for the property to be used for other purposes other than residential.
This includes development and agriculture.
However, you may still be able to get a residential loan with a much cheaper interest rate and better terms.
Since the valuation would come in lower, you would have to provide a larger deposit so you’d have the weigh up the benefit of paying a larger deposit compared to paying a lower interest rate.
How does it work?
By building the right case, a specialist mortgage broker may be able to convince the bank to advise the valuer (in writing) to disregard highest and best use and just rely on comparable residential sales.
Golden tips on choosing an acreage
What you should look for in an acreage will depend on whether you intend to grow food on the land or using the property for recreational use such as horse-riding.
However, you may want to consider the following:
- Get a soil test to ensure the land is fertile enough to support crops.
- Sufficient space and fields for grazing a handful of cattle and horses.
- Close and easy access to ponds and lakes with uncontaminated water.
- A working dam or, alternatively, a bore water system.
- Zoning that allows for any renovations or improvements you’re intending to make. For commercial improvements, you may be restricted by rural residential zoning.
- Apart from soil contamination, consider the land’s proximity to oil, gas and other mining operations. These can have major environment affects.
- The natural environment can be a potential hazard so find out whether the property is bushfire prone or in a flood zone.
- Ensure that all structures including the house, stables, fences, gates, wells and everything else are in working order before committing to the purchase.
- Ensure that you’re across any licences you need to own and raise certain livestock and whether the property itself meets these legislative requirements.
Don’t pay the emotional price
There are practical ways to inspect an acreage and arrive at a fair offer.
However, the problem with hobby farms is that the market price is often driven by emotion from a wide variety of buyers.
An acreage can appeal to a buyer after a reclusive lifestyle while others want the land for commercial reasons.
This may be for running a small business or for storing vehicles and equipment.
The price someone is willing to pay is highly subjective with these types of properties so it isn’t unusual for auction values to quickly blow out.
Set yourself a budget and definitely avoid buying at auction without a pre-approval first.
Do you want an acreage loan?
We’ve helped many Australians to buy their own rural property with an acreage loan.
Call us on 1300 889 743 or complete our free assessment form and one of our specialist mortgage brokers can let you know if you qualify.