buying vacant land and construction home loans

Loan for Vacant Land

Loans for vacant land are not available from all lenders. Vacant land is classed with construction because regulations require borrowers to commit to construction. Otherwise the land purchase is considered a speculative investment loan rather than a residential loan

Construction loans are typically limited to 12 months, but can be extended where circumstances have changed. How your loan is considered depends on whether you are buying just the land, a house and land package or an off the plan package. For just vacant land you will usually need 5% to 10% deposit but remember that you have to commit to commence construction and so most lenders will want to understand how you are going to come up with sufficient funds for the rest of the work ie: lenders will require you to have a minimum 5% of the construction cost or at least see how you plan to accumulate those funds over the relatively short term that you have.

House and Land Construction Home Loan

For house & land packages, lenders are pretty comfortable as they can see the plans and contracts prior to approval. They also control the funds by making progress payments to the builder as milestones are met.

On construction loans lenders must estimate the completed value of the property (TOC), from which they base the security amount for lending. Typically this is done by adding together the value of the land and the price of the fixed price builders contract. For example, if the land is $200,000 and the building contract is $200,000, then the TOC is $400,000, normally the land and the plans are assessed by an independent valuer appointed by the lender. It is from this figure that the lender calculates LVR. It’s important to understand that variations to contract and items not listed in the contract, eg driveways, window coverings and floor coverings are not normally included in the assessment of the value of the property eg: in the above example, if the building contract did not include floor coverings, window coverings and driveways the customer should have an extra $40,000 approx to cover such items. Lenders usually require an inspection and formal confirmation of completion of the construction before they release the final progress payment.

Off the plan is more common with apartments than houses although some developers will build houses off the plan in order to have suitable stock in place for when the general release begins. Off the plan developments usually require a 10% deposit and this may be covered by a deposit bond. Although be very careful as strict eligibility conditions apply and so make sure that you can get your deposit bond before committing to a contract.

Off The Plan

Off the plan developments are typically long term 12 months to 3 years in advance. However apart from the deposit there is no financial commitment from you until the construction is complete. It can be stressful at this stage as you may only have 21 or even 14 days notice to have the funds for settlement. Since lenders are often unable to get access for their valuers until the building is complete this can place undue stress on the settlement process. Check your purchase contract closely for this and seek legal advice before you sign.

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