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Most Australians build new homes by purchasing a house and land package, where you pick the block and choose from a range of designs offered by the developer to build a new home.

But you can also buy a vacant block of land and then build a house separately, without going through a developer. If you decide to go down this route, you’ll probably need financing. A land loan may be the answer.

What is a land loan?

A land loan is a type of financing you get when you purchase a block of land on which you intend to build a property on in the future.

A land loan is different from a construction loan, which is typically used on a draw down basis as the property is being built. Another difference between a land loan and a construction loan is the timeframe of the construction of the property. Land loans generally don’t have a time limit on when you need to start construction by, unlike construction loans which generally require construction to be completed within one to three years of when the loan was borrowed.

Land loans typically have higher interest rates, fees and different conditions than a regular home loan. This is because land loans are seen as being higher risk as land prices are more prone to fluctuations and are harder to sell than an existing property.

What do lenders consider when approving land loans?

There aren’t many lenders who offer land loans because they’re considered riskier. As a result, lenders who do offer land loans are careful about who they lend to.

When assessing applications for a vacant land loan, lenders look into the three L’s: Land size, location, and land purpose.

Land size

Land size will determine how much of a deposit you need when you apply for a vacant land loan. Every lender has different rules, but you can generally borrow up to 95% of the land’s value if the land is up to 2.2 hectares in size or up to 11 hectares. Anything bigger than this will typically require a 20% deposit.


Part of the lender’s assessment process is to look for access and zoning regulations of your desired vacant land.

The more accessible your land is to main roads, the higher the chances that you will get approved. You will also need to ensure that your land is zoned for residential use to avoid any issues when applying for a land loan. Your land will also need to be within range to connect to an electrical grid. While it’s not usually a requirement to have access to sewage facilities or town water, your borrowing power may be limited if you don’t have access to these services.

You will also need to ensure the land is registered. Registered parcels of land are connected to services like roads, electricity, and have registration approvals from the local authorities. While some developers offer unregistered land for sale, it is very unlikely that you will get loan approval if you are applying for an unregistered one.

Land purpose

While you are not required to build on the vacant land immediately after purchasing, the lender will definitely ask you when you plan to build. If you have plans to build a few years down the track or have no plans set in stone, the lender will consider you a higher risk. Having plans to build a home in your land within a few years will help you secure your lender’s approval.

The lender will also want to know what you intend on using the vacant land for. Will you build an investment property or a property to live in?

What are the pros of a land loan?

The biggest upside of getting a land loan is being able to purchase land without having the pressure of saving a bigger fund for a house and land package. This works best for those who have limited budgets and would like to have a little more time to save for a construction loan.

This brings another advantage — you will not be pressured into building on the land straight away after purchasing it. A land loan provides no time limit for the construction of your home. However, you must make sure that you give your lender assurance that you have plans to build on your land in the future.

What are the biggest drawbacks of applying for a land loan?

As mentioned earlier, land loans are categorised as high-risk financing — therefore, lenders usually charge higher interest rates to these loans. Furthermore, going the land loans route will require you to get a construction loan once you are ready to build.  

This means that in some situations, getting a land loan will be more expensive if overall costs are considered. However, at this cost, you will be able to take your time to save for the construction of your house.

How much deposit do I need for a land loan?

How much you need for a deposit will come down to the size of the land and the lender’s rules. Different lenders have different rules about the required Loan to Value Ratio (LVR) for the land. As a general rule, the larger the land, the bigger the deposit. This is because large blocks of land are even more susceptible to price fluctuations, which increases the risk to the lender.

You can generally borrow up to 95% of the land’s value for land up to 11 hectares (5% deposit). Anything above this will generally require a minimum 20% deposit. In some cases, for very large plots of land an even bigger deposit may be required.

In any case, if you don’t have a 20% deposit, you’ll often be required to pay for LMI.

What are the factors to consider when applying for a land loan?

If you are all set in applying for a land loan, start your search for the best lender and loan offer that will fit your needs. A mortgage broker can help you but these are some of the things you need to look for when searching for a land loan:

  1. Interest rate: Land loans tend to have higher advertised rates compared to other home loans due to the risks associated with land purchases. Make sure you also consider the comparison rate, which will give you an estimate of the overall cost of the loan.

  2. Fees: Be sure to ask your lender to break down the costs associated with your land loan, including the fees that might be hidden in plain sight. Land loans generally have similar fees that regular home loans have, however some lenders may charge higher fees or waive them.

  3. Deposit: Depending on the size of your chosen land, you can borrow as much as 95% of its value. Be reminded, however, that you might be asked to pay LMI if your deposit is less than 20% of your land’s value.

  4. Features: As with home loans, lenders can provide you with useful features for your land loan to help you pay it faster.  These features include additional payments, flexible terms, and offset and redraw facilities.