What do most lenders think of rural properties?

An idyllic life in the country away from the hustle and bustle of the big smoke: it’s a sentiment that most Australians share and with a rural home loan you can make it a reality.

Most banks are very strict when it comes to large land sizes anything more than 10-15 hectares as well as properties located a considerable distance from a major city or town centre.

Not all lenders are the same though and that’s why it pays to have a specialist in rural home loans who can help you to get approved the first time around.


How much can I borrow?

Depending on the size of the land, its location and what you intend to use it for, some lenders will allow you to borrow the following:

  • Land size up to 10 ha: You can borrow up to 95% of the property value.
  • Land size up to 50 ha: Borrow up to 95% of the property value.
  • Land size up to 60 ha: Borrow up to 80% of the property value.
  • Land size up to 100 ha: Borrow up to 70% – 80% of the property value on a case by case basis.
  • Land size 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 your intention is for lifestyle and nothing more.
  • 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.
  • Guarantor loans: Borrow up to 100% with select lenders only.
  • Discounts: Competitive professional package and basic loan discounts are available for rural properties that are up to 100 ha in size.

Please call us on 1300 889 743 or enquire online and we can tell you if you qualify for a rural home loan.


How big is the property?

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.

This is also the same for liveable sheds that are council-approved as a Class 1a structure (inhabitable dwelling).

The only exception is for land over 200 hectares where banks can be conservative across the board.

Why is size such an issue?

Like all properties that banks use as “security” for your mortgage, they’re mainly concerned about “saleability”, that is, they want to be able to easily sell the property should you no longer be able to make your mortgage repayments.

It’s the reason why they will more readily accept a standard residential property on standard block within 100km of a metro location. There’s simply a larger market available whereas for some rural locations it may take weeks or even months to find a buyer.

And banks aren’t into speculative investing either! The bank is making money from the interest you pay on your home loan and won’t see any potential gain that you may be predicting from the purchase.

They will only look at the property on face value or as if they were going to sell it today and not ten years from now after some renovation work.


Is it residential or commercial?

The second thing banks generally consider is what you intend to use the property for.

If you’re intending to use the land for farming or any other commercial use, you’ll need to apply for an agribusiness loan instead which can come with much higher interest rates.

Even if you’re simply using it as a lifestyle block or a home away from home, it’s not necessarily that simple to qualify for the cheaper pricing of a rural home loan.

Firstly, the bank wants to know you’re not relying on income generated from farming activies in order to afford the loan.

Secondly, banks will look at the property on face value and if they see signs that it has the capability of operating as an income-producing enterprise, they may prevent you from going down the residential loan path.

Specifically, they’ll be looking to identify any of, but not limited to, the following:

  • Large crop plantations.
  • Dairy farm capabilities including working milking machines.
  • Commercial orchards with thousands of trees.
  • Several cabins or tourism-style accommodation.
  • A large herd of cattle.

That’s not to say that you can’t necessarily earn a bit of extra cheddar on the side to supplement your income.

Generally speaking, lenders will allow you to earn up to $20,000 in gross income from any farming activities you undertake on your property.

If you want to buy an agribusiness we can help you finance it!

Call us on 1300 889 743 or complete our free assessment form and we can help you put together a strong case with the right lender to get you the commercial loan your need.


What do valuers consider as an agribusiness?

The red flag for most valuers is whether there is an ability to offset agribusiness losses against other income sources.

This is the reason that rural properties that turnover at least $20,000 are usually consider “income-producing”.

However, there are factors a valuer will consider:

  • Income from agricultural activies has produced a profit ahead of the cost of owning the property in 3 of the last 5 years, including the current year.
  • It’s clear to the valuer that you intend to develop the land for the purposes of undertaking agricultural activities.

What do most banks think of rural properties?

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.

Because of this higher volatility, banks tend to be more conservative when approving rural home loans.

In addition to this, many of these types of properties tend to be bushfire and flood prone which also affects marketability and means that higher insurance usually applies.


So how do I get assessed for a residential loan?

Banks are more interested in approving home loans for smaller lifestyle properties rather than financing a commercial farm.

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.

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 else will banks take into account?

Location

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. Some lenders don’t have any postcode restrictions at all!

Good access via roads

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.

Services connected

When it comes to electricity, water and sewerage connections, partially-serviced rural properties 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, rural properties with solar power will sometimes be accepted if the property isn’t connected or is at least within range of the electricity grid.


Can zoning be an issue?

Some lenders take the zoning of your property into account and others don’t. The most common types of zoning 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 rural properties 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 rural properties and other times commercial farms. The land size and usage will determine how much we can lend.

QLD and WA rural property zoning

Zoning in Queensland and Western Australia differs from council to council so it’s best 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 rural properties 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.


You can benefit from an asset test concession

If your plan is to eventually retire on your rural lifestyle block and you’re not intending to use the land for income generation, you may qualify for an assets test concession for the purposes of receiving the age pension.

This applies to land that is more than 2ha and cannot effectively be used for commercial purposes.

What this means is that you may qualify for the age pension or qualify for a much higher pension rate for because the property won’t be included in the assets test.

Other conditions may apply so please refer to the ‘Rural customers and primary producers‘ page on the human services website.

Also, please speak to your accountant and financial planner in regards to retirement planning and what government payments you may be entitled to.


Does the property have development potential?

Although we can’t provide investment advice, investors may generate a significant return on investment (ROI) by doing their homework.

Planning and zoning rules change on a regular basis and by being on the front foot, you’ll be able to identify land that may likely be subdived for residential or commercial purposes.

Consider, for instance, properties located around Mulgoa and Luddenham in Sydney’s western suburbs.

These properties were considered to be rural properties 40-50 years ago.

Not many people predicted the emergence of bustling residential developments.

At the time, these locations only generated interest from immigrants and people nearing retirement looking for a seachange.

Chinese market gardens were quite popular at the time because they were farming regions with good soil and irrigation sources.

As the Sydney population continued to grow, council planning laws needed to change and developers quickly snapped up the land.

Residential construction has only continued as a result of the Badgerys Creek Airport contruction project.


What every investor needs to know

Typically, if zoning and planning rules allow for subdivision, and comparable sales show a high number of developer sales in the area, your rural property may be assessed as a commercial deal.

This means you’ll typically be restricted to borrowing 70% of the property value and will have to pay a significantly higher interest rate.

However, you may be able to avoid this if the property can be valued as a residential property instead.

By presenting a case to the bank that you intend to live in the property, they can advise the valuer to ignore highest and best use and developer sales.

Of course, there are no guarantees since it’s up to the valuer’s discretion as to how they arrive at a market valuation.

Wait, so if it comes in under market value, doesn’t that mean I’ll have to come up with a larger deposit?

Let’s just say you found a 40ha rural property in Toowoomba, Queensland.

The zoning allows for subvision and commercial development so the market value comes in at $1.5 million.

If you rural home loan application was assessed as a commercial deal, you will generally be resticted to borrowing 70% of the property value.

This means you’d need to come up with a $450,000 deposit or by leveraging equity in any existing residential properties that you own.

Note, this doesn’t include the cost of completing the purchase, such as stamp duty, legal fees and loan costs.

Let’s just say the valuer undertook a residential valuation instead and the price came back at $800,000.

For a 40ha rural property, some lenders will allow to borrow up to 95% of the property value or $760,000.

However, the sale price isn’t $800,000. It’s $1.5 million as per a commercial valuation.

That means you’d actually have to come up with a $690,000 deposit. That’s around $240,000 more!

Despite this, sophisticated investors have the capital to come up with a larger deposit.

The key is weighing up the benefit of paying more upfront in order to reap the savings of a much cheaper home loan.

It’s not uncommon for investors to hold on to a lifestyle block for as little as 3-5 years and then sell to a developer and generate a significant ROI.

Paying residential rates instead of commercial rates during this holding period makes sense in certain cases.

Again, this shouldn’t be taken as financial advice.

Property investing carries with it a level of risk so you should consider your own financial situation and goals before investing in real estate.


Apply for a rural home loan

Our mortgage brokers are credit specialists with particular expertise in unusual property types like rural properties.

These types of properties sometimes fall outside normal lending policy and some lenders are more flexible when it comes to approved rural home loans.

We have nearly 40 different lenders to choose from so we will package your application with the right one so you have the best chance of getting approved and start living the life you want.

Please call us on 1300 889 743 or enquire online for a free, no obligation assessment of your situation.

  • MGM

    How can I find out the postcode category of the location where I’m buying?

  • Hello MGM, you can use the postcode calculator to find out the category of the location of your rural property. It will also show if there are any location restrictions, and if there are, please speak with one of our mortgage brokers on 1300 889 743 to find out if there’s anything that can be done to mitigate that:
    https://www.homeloanexperts.com.au/mortgage-calculators/postcode-calculator/

  • MattH

    I want to buy a 9 hectares rural property in NSW. The property value is $590k but I want to add in a few cabins so I want to borrow $820k. I have $100k in savings, a great and consistent income and a guarantor as well. Can you guys help?

  • Hi MattH,

    Yes, we can help although it’s likely that your guarantor must own 20% to get a commercial lender to do this. We know a couple of lenders who have special teams for small farms. You can consider doing one loan now to buy the property and a second one later to build the cabins. We can then discuss future plans with the lender. Please call us on 1300 889 743 to discuss this with an expert rural property mortgage broker.

  • Roddy

    How much can we borrow to buy a vineyard? What do lenders generally consider when buying these properties?

  • Hey Roddy,
    You can generally borrow up to 50-70% of the property value depending on the mix of vines compared to the rest of the property. However, with a guarantor, you can even go up to 100%. Most banks would prefer to lend against a mixed farming property. For example, around 25% of the land contains vines but the remaining 75% can be used to raise livestock or to grow other crops. This opens up the market to a wider mix of potential buyers, reducing the bank’s risk if they had to sell your property due to mortgage default. Please check out the vineyard loans page to get a clear understanding of all this:
    https://www.homeloanexperts.com.au/commercial-property-loan/vineyard-loans/

  • Ilene

    I want to buy a 500 acre rural property priced at a bit over $600,000 and I need to borrow at 85% LVR to finance the purchase. I can sell existing property to assist with the purchase. Can this be done?

  • Hi Ilene,
    The size of the property is huge and so banks will be very conservative with their lending for this. You may not be able to get final approval unless you are willing to borrow at a lower LVR or get a commercial loan instead.

  • Kristy

    We are literally in the middle of applying for a homeloan for a 9.88 hectare (just under 25 acres) property in southern NSW. It is zoned RU1 Primary Production. We only intend to use this as a lifestyle block, as we both work. We just applied through NAB and have been declined due to it not being within 10km of a branch, 50km of a town of 20,000 population or 20km 10,000. The property is 26km from the branch and closest town! We actually had pre approval with them and got all the way to this point and then they declined due to distance, this is our bank that we have all of our accounts with. We have literally applied with Bendigo Bank yesterday and are still waiting on the outcome. The purchase price is $230,000 and we have $30k to go towards this (10% deposit, stamp duty, LMI etc). Joint income of $75k, low credit limit $3800 with balance less than $1k, personal/car loans less than $16k. Really hoping for a positive outcome as in jan we researched, and were given the opportunity to move into the property and rent it, and had the option to buy within 6 months (legal agreement). We have excercised the option to buy as we believed NAB were going to get us over the line and we have been let down. This is so stressful, just waiting. We literally have days for this to go through!

  • Hi Kristy,
    Yes we can help with this with a loan for up to 95% of the property value. I’ll email you with a list of documents required and cc one of our rural property experts who will be working on the public holiday this Monday.
    Best of luck with your purchase and please don’t stress it sounds like the vendors are negotiable and will understand the delays. We handle loans like this all the time.