More and more Australians are opting for a ‘green change’ and heading to the countryside to live off the land. Although a small farm or lifestyle block can be an exciting change, they can be difficult to finance.
The fact is the majority of lenders do not offer loans for properties that are over 10 hectares (25 acres). Are hobby farm loans available for large lifestyle blocks?
How much can you borrow?
- Land size up to 10 ha: You can borrow up to 95% of the property value.
- Land size up to 50 ha: You can borrow up to 95% of the property value.
- Land size up to 60 ha: You can borrow up to 80% of the property value.
- Land size up to 100 ha: You can borrow up to 70% – 80% of the property value on a case by case basis.
- Land size over 100 ha: These farms may not be considered as “hobby farms” by the banks. Please discuss your situation with us if you believe your property is not “income-producing” (see below definition).
- Investment: Borrowing is restricted to 90% of the property value but you may be able to borrow up to 95% if the property is less than 2 ha.
- Commercial farms: Larger agricultural businesses can be financed, often loans are limited to a maximum of 60% of the property value. Please discuss your situation with our mortgage brokers.
- Guarantor loans: Borrow up to 100% with select lenders only.
- Discounts: Competitive professional package and basic loan discounts are available for blocks that are up to 100 ha in size.
The main problem banks have with financing a hobby farm is to do with the improvements that typically need to be undertaken and what the farm is used for. Please read below for more information
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 hobby farm.
What is a hobby farm?
Generally speaking, a hobby farm is a rural property used for the purposes of small-scale farming.
Strictly speaking, the farm is designed for personal fulfillment or self-sustainability rather than for the purposes of turning a profit from a commercial basis. In saying that, small-scale working farms have been known to provide diligent owners with a second source of income.
Some of these small-scale agricultural operations are the same for a commercial farm and can include such activities as growing fruit and vegetables or raising farm animals like cows, chickens, sheeps and pigs.
Want to know more about hobby farms?
Check out the ‘What Is A Hobby Farm?’ page.
When is a rural property ‘income-producing’?
The test for most valuers is whether there is an ability to offset business losses from a farm against other income.
Typically, this is where:
- Turnover from the business activity is at least $20,000.
- The business has produced a taxable profit in 3 of the last 5 years including the current year.
- The value of the property carrying on a business is at least $500,000
For example, you will often find hobby farms with cattle or agistment (the contract for taking in and feeding horses or other cattle) where the owners want to earn at least $20,000 to get the ability to claim their losses from the farm against other income forms.
Do you intend to develop the property for significant agricultural activities?
Do you need some of this income to prove that you can afford the loan?
If so, it’s likely that the valuer will class the property as income-producing.
Are they a good investment?
As mortgage brokers, we can’t provide advice on buying a property but what we can say is that the market for hobby farms is looking a lot better than what it was in the first few years after the Global Financial Crisis (GFC).
Specifically, the demand for small farms within 100 kilometres of a capital is actually quite stable although you’re looking at around six to eight weeks to sell if your plan is to invest.
Like any potential investment property though, it’s essential you do your own due diligence because they each have their own strengths and weaknesses.
Are there location restrictions?
Like buying any other type of property, some lenders have location or postcode restrictions.
Luckily, we know two lenders who are less conservative when it comes to location so complete our free assessment form and one of our hobby farm specialists can tell if you qualify for a hobby farm loan.
Does the zoning matter?
Some lenders take the zoning of your property into account and others don’t. The most common types of are listed below.
NSW rural property zoning
- General Residential (R1): Small properties often under 2 hectares that are next to regional centres. Normally acceptable.
- Rural Landscape (RU2) NSW: A flexible zoning that allows many agricultural, tourism and residential housing uses. The land size and usage will determine how much we can lend.
- Large Lot Residential NSW (R5): Typically residential housing in a rural location. Normally acceptable to our lenders.
- Rural Residential Zone NSW: This zone has been replaced by ‘Large Lot Residential’ but many properties are still in the old zone. This can also be broken down to ‘rural fringe’ and ‘rural living’. This is normally acceptable for lending purposes.
- Rural Small Holdings NSW: This typically refers to hobby farms and lifestyle properties in rural areas. Normally, properties in this zone are acceptable to our lenders.
- Primary Production NSW: Typically used for extensive agriculture rather than intensive agriculture. The land size and usage will determine how much we can lend whether you may need a farm loan instead.
VIC rural property zoning
- Rural Living Zone (RLZ) VIC: Usually used for residential purposes with minor agricultural activities.
- Rural Conservation Zone (RCZ) VIC: Rural areas of environmental importance. A single house can be built, typically acceptable for lending purposes.
- Rural Activity Zone (RAZ) VIC: A flexible zoning that allows agricultural, residential, tourism and business use. The usage of the property will determine how much we can lend.
- Farming Zone VIC: Sometimes these are hobby farms and other times commercial farms. The land size and usage will determine how much we can lend.
QLD and WA rural property zoning
Unlike New South Wales and Victoria, zoning in Queensland and Western Australia differs from council to council.
In this case, it’s better to contact your specific council and ask them what the land can be used for and what the limitations are.
You can then contact us so we can let you know if we can help you.
All other states
All hobby farms in the ACT are acceptable with at least one of our lenders. For rural properties in SA, NT and TAS please contact us for information regarding what finance is available.
Each lender assesses rural properties in a different way. Some will not approve particular zonings while others only consider the land size and usage.
Is the property in a commercial farm type zoning?
Call us and we can see if we can get you approved for a commercial loan.
Is the property in a hobby farm type zoning?
Then it will likely be accepted depending on the land size and usage!
Please call us on 1300 899 743 or fill in our free assessment form and one of our mortgage brokers will contact you to discuss your options.
When does a hobby farm become a commercial farm
The main question that the banks will ask us is if the farm is a commercial farm or a hobby farm. For example one of our banks has the following policy:
“The use of the property is solely for the purpose of private residential occupation, including private residential occupation by a tenant, (i.e. must not be used for commercial income producing purposes or as a short term speculative investment or development).
Another lender takes the position that once market gardens and other farming properties are able to produce or have the potential to produce sufficient income to meet operating expenses and sustain the farm enterprise they are generally no longer considered as hobby farms.
In some cases, the land may be used for the growing of crops and/or the holding of limited stock, however this is only for the purposes of the private use and enjoyment of the owners. Income may be earned through the renting of the property to a tenant. (i.e. rental property investment).
Note: Any valuation obtained must be based on the land and residence value only. The valuation must not include income producing potential of the land, sheds, machinery, orchards, livestock, etc, which are used for income producing purposes.”
As you can see the banks are more interested in approving home loans for smaller lifestyle properties rather than financing a commercial farm. If you plan to make a business out of running a farm, you can apply for a commercial loan instead.
Can I get a standard loan?
Farms are either classed as commercial or hobby based on the valuer’s assessment but there may be ways to get assessed like a standard home loan applicant depending on the strength of your case and the lender.
If the equipment, land or overall means to run the farm are present but you have a 20% deposit (you’re only borrowing 80% of the purchase price), a lender may still approve your home loan application without having to go to their commercial or business credit team if you can prove that you can “service” the debt without needing income from the farm.
What this means is that as long as your income, employment and asset position is strong and stable enough to service the mortgage without income from the farm, we may still be able to get you approved with some lenders.
What improvements are allowed?
There is no hard and fast rule when it comes to which improvements are considered as residential and which are considered as commercial.
Generally, it’s best to send us the link to the property’s listing in a real estate website and we can let you know where you stand.
Here are some examples and how the banks would assess them.
- Standard house, liveable shed or vacant land.
- Small orchard that doesn’t produce income.
- A few cattle or horses.
- A small machinery shed.
- A dam.
- Several paddocks and some bushland.
- The likely buyer of this property would use it as a home or holiday house.
- 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 significant herd of cattle.
- All other agricultural activities.
- The likely buyer of this property would use it as an income-producing farm.
That’s not to say that both types of property won’t be considered by a lender!
It’s simply easier to finance a hobby farm than a commercial farm and the best part is that you can access much cheaper interest rates than going down the commercial route.
Applying for a hobby farm loan
It helps to get advice from a mortgage broker that specialises in hobby farms before deciding to apply for a home loan.
They can help build a case that addresses the bank’s requirements on land size, location and how much income may be generated from the operation.
Please call us on 1300 889 743 or enquire online and one of our mortgage brokers who specialises in hobby farms can help you to apply for a home loan.
What should I look out for in a hobby farm?
Check that the land is suitable for what you’re planning to use it for
This can include fertile soil for growing produce and, for the purposes of caring for animals, fields for grazing and clear access to water sources, such as ponds and lakes.
If you’re buying vacant land then check with council to confirm that you are allowed to build a dwelling on the property.
Check with council regarding zoning and infrastructure projects
Zoning changes all of the time and planned or ongoing infrastructure or commercial projects can have a major affect on your ability to run a hobby farm. For example, a new motorway can affect the peace and quiet that you were after in the first place, while, from a practical perspective, a new mining or gas project can have a massive effect on the health of the surrounding environment and your ability to grow produce.
In terms of actually getting approved for a hobby farm loan, did you know that there are lending restrictions on bushfire prone properties, many of which are located in the same rural areas as lifestyle farms?
Check that you’re getting what you pay for
Sometimes the farm will come with everything you need including built-in stables or houses for animals, troughs, feeding dispensers and fences. That’s great but it also means you have to ensure that you’re getting what you pay for, that is, making sure all of the amenities are in good condition and to code.
Be aware of local council restrictions as well as state and federal laws and licensing requirements regarding the use of land and owning farm stock.
For more resources and tips on lifestyle farms, go to farmstyle.com.au.
What do the banks assess?
Hobby farms can be assessed in several ways by our banks, depending on the location and the size of the property.
Land size: There is technically no maximum land size. However, to qualify with most banks the land must be less than 10ha. Some banks can consider up to 50ha and one can consider any size land as long as the property is not being used for business or income-producing purposes.
Banks are likely to be very conservative with properties over 200 hectares.
Location: Each lender has their own postcode restrictions. At least two of our lenders have no postcode restrictions at all, although, remote properties will always be difficult to finance.
Access: The land must have easy access using an all-weather road. Dirt roads are fine as long as they are well maintained.
Services: The land must be within range to be connected to the electricity grid without excessive costs or have solar power. Town water and sewerage services aren’t required as many Australian properties have tank water or septic tanks instead. Fully-serviced and partially-serviced blocks are both acceptable.
Zoning: Land can be zoned rural, rural residential or the equivalent for your state. Be careful with land that is zoned industrial, commercial or for farm use as they are generally not accepted or may be considered as a commercial farm unless it’s clear they can’t be used as a home. 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.
Land use: The land can only be used for personal or investment purposes, not as a commercial farm. Hobby farms with minor farm improvements and that don’t produce income from farm production are usually accepted.
Why are the banks so conservative?
During times of drought or during economic downturns, farms tends to fall in value and take longer to sell. This is particularly true in country areas and remote locations where land prices fluctuate more often.
Normal houses on the other hand have more potential buyers and so tend to sell much faster.
Because of this higher volatility, banks tend to be more conservative when approving a home loan for hobby farms.
In addition to this, banks consider commercial farms to be businesses, not a lifestyle purchase so they can only be considered for more expensive commercial loans and business loans.