Can I get finance for my lifestyle block?
Tired of the city life?
Dragon lyrics aside, around one in five Australians live in inner regional areas and one in ten live in outer regional areas, according to the Australian Institute of Family Studies. This figure is expected to grow as more Aussies choose to “go bush” and live off the land.
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. What else do you need to know?
How much will the banks lend me?
Apart from location, the first thing most lenders will take into account when it comes to rural acreage is the size of land.
Land size will have a direct impact on the Loan to Value Ratio (LVR) that the lender will approve so in most cases:
- 10 ha: You can borrow up to 95% of the property value.
- Up to 50 ha: Borrow up to 95% of the property value.
- Up to 60 ha: Borrow up to 80% of the property value.
- Up to 100 ha: Borrow up to 70% – 80% of the property value on a case by case basis.
- Over 100 ha: At this size, banks will often see it as “income-producing” even if that isn’t your purpose. It’s best to speak to us if you’re intention is for lifestyle and nothing more.
- Liveable sheds: Borrow up to 90% of the property value or up to 80% of the land value.
- Commercial farms: For land that you intend to use for commercial farming, loans are usually limited to a maximum of 60% of the property value.
- 100% loans: Available with some of our lenders if you have a guarantor.
- Discounts: Competitive professional package and basic loan discounts are available for acreage that is up to 100 ha in size.
As with all types of property, banks are mainly concerned about the “marketability” of the property.
When it comes to acreage, banks want to ensure that the property can be easily sold in the event that you default on your mortgage so they can recoup any losses.
Please call us on 1300 889 743 or enquire online and one of our mortgage brokers will let you know which lenders will accept your acreage.
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.
Although you may still have an opportunity to generate a bit of return from the property through small-scale farming, acreage properties are mainly bought for recreational use and lifestyle which is the reason while they’re sometimes to referred to as “hobby” farms.
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 longer be considered as 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 only and not 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 also 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.
Because of this, banks and valuers tend to follow a few golden 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 ess 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 that, banks characterise properties by what the valuers identify.
They will often class a rural property as residential acreage if they see signs of the following:
- 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.
Acreage that the banks identify as having a commercial purpose will usually have the following characteristics:
- May or may not have a house,
- Large crop plantations,
- Dairy farms,
- Commercial orchards with thousands of trees,
- Several cabins or tourism-style accommodation,
- A large herd of cattle,
- Other agricultural activities.
We can help!
Our mortgage brokers are credit experts so we know exactly how to package your deal so you can qualify for much sharper residential interest rates on your acreage loan.
It’s all about choosing the lender with the most flexible policy so tell us about the property you’re looking at by filling in our free assessment form today.
What do banks look for in a residential acreage?
So 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 commercial 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 are 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 just yet!
By going down the commercial farm loan path, the interest rates will be higher, you’ll need a slightly bigger deposit and you’ll usually need to provide some sort of business plan that shows how you intend to run a successful venture.
Past experience and skills are the key to getting approved.
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.
Better yet, call us on 1300 889 743 or complete our free assessment form and we can let you know if we can help you.
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 this type of investing so you should seek independent financial advice before making a decision.
How to avoid commercial rates
Although you don’t intend to use the land for agribusiness, you may still be hit high commercial interest rate based on the valuation report.
Among the methods that valuers use when undertaking a valuation, they will take into account highest and best.
This means they look at the potential for the property to be used for other purposes other than residential including development.
However, you may still be able to get a residential loan with a much cheaper interest rate and better terms.
Since he valuation would come in lower, you would have to have to provide a larger deposit so you’d have the weigh up the benefit of paying larger deposit compared to paying a lower interest rate.
How does it work?
Apart from highest and best use, the valuer will consider the buyer and their intentions.
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 you’re simply using the property for recreational use such as horse-riding or dirt bike riding.
However, you may want to consider the following:
- Get a soil test to ensure that it’s fertile enough for growing 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 bore water system if applicable to the property you’re looking at.
- Zoning that allows for any renovations or improvements you’re intending on making to the property. If you intend to make commercial improvements, you may well be restricted by rural residential zoning limitations..
- 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 may require in order to own and care for certain livestock and whether the property itself meets those legislative requirements. You can always make these improvements yourself but bear in mind the potential costs.
Don’t pay the emotional price
There are practical weighs 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.
Depending on council planning rules, an acreage can appeal to a buyer wanting to taking advantage of a reclusive lifestyle while others want the land for practical 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?
You’re not the only one looking to escape the rat race!
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.