Home loan

Land loan vs home loan: what are the differences?

If you hope to achieve the great Australian dream of owning your own home, you can look for existing accommodation in an area that meets your needs. On the other hand, you might aspire to buy some land and build your house from scratch.

While either can help you achieve those dreams, there are significant differences between a home loan and a land loan, also known as a vacant land loan, to help fund those dreams in terms of qualifications and conditions imposed by the lenders.

Consider discussing your financial goals and situation with a lender or mortgage broker before deciding to buy a house or land or choose a house and land package.

Why can land loans cost more than home loans?

Land loans are generally intended to finance the purchase of vacant land on which you plan to build a house. You can buy land that has not been registered, which means that there is probably no road connecting to it or there is no connection to the electricity grid.

Also, the value of a lot is more likely to go up or down than the value of a house, especially if the size of the lot exceeds a certain threshold. For this reason, land loans represent a higher risk for lenders, which they compensate for by requiring a larger deposit and charging a higher interest rate.

When you apply for a land loan, the lender will assess any risk based on the size and location of the land, its accessibility to road and utility infrastructure, its purpose, and its intended use. If you’ve made plans to build and live in a house, lenders may see you as a less risky borrower and consider your loan application more favorably than if you don’t know why you’re buying the land.

Also, the loan-to-value ratio (LVR) approved by the lender for a land loan tends to be lower, and you cannot get more than an 80% LVR loan unless you have a guarantor or that you qualify for the First Home Loan Deposit System.

Is a mortgage with a housing and land complex cheaper than a mortgage?

If you are confident about building your home on the land you are purchasing, finding a developer that offers a house and land package may be an option to consider. The developer may have already registered the land and put in place the necessary infrastructure.

From a financing perspective, you will need to apply for a land loan as well as a construction loan. Note that with a construction loan, a lender releases the loan amounts to you in stages, first for the purchase of the land and later throughout the process of your construction, such as laying the foundations or roof installation, etc.

The advantage of choosing a house and land package is that you may only have to pay stamp duty on the land and not on the house – if the house is not yet built. You can use an online stamp duty calculator to find out how much you could save.

On the other hand, you may need to ensure that the land appraisal is accurate and that the developer has included all construction costs, or end up paying out of pocket for unaccounted-for expenses. Consider checking to see if your lender will allow you to take these costs into account when approving your home loan.

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