Mortgage for land (A 5 point guide)
By
HuutiMoney
In this brief blog, we will cover getting a mortgage for land, what you may want to consider, how to improve your eligibility for mortgages for land and how they are different from a residential mortgage.
Can you get a mortgage for land?
If you are looking to purchase land then you may need a land mortgage. So at this point, you may be wondering what is a land mortgage and how can you get a mortgage to purchase land. Land mortgages are essentially mortgages that allow you to buy land. Land mortgages aren’t the only option if you want to purchase land. You may be able to use a bridging loan or even a commercial mortgage or construction mortgage.
Land mortgages aren’t limited to residential land, they can be used for commercial land, industrial land and agricultural land.
Land mortgages can be obtained for developed land (Land that has some structure or property on it) or undeveloped land (land that does not have any property or structure on it).
Land mortgages come in all shapes, forms and sizes and you will likely be able to find some sort of land mortgage regardless of what you are using the land for.
You may not find many high street banks which offer land mortgages but a variety of non-high street mortgage lenders will offer land mortgages.
You may need a specialist mortgage broker to help you get a mortgage for land as this is considered a specialist area of the mortgage market.
If you have been declined for a land mortgage before don’t be too disappointed, the chances are there are mortgages for land out there which you will be eligible for.
As long as you meet the standard mortgage affordability requirements for a mortgage you may be able to get a mortgage for land.
How can you buy land?
You can buy land through a variety of different methods. This include:
Buying land at auction
Land is often sold at auction and you may need the land mortgage arranged already so you can complete on the purchase as soon as possible. A bridging loan may be essential for you if you want to move faster.
Bridging loans are much faster to get and could be used for as long as 36 months although usually used for less than 12.
You will usually need to complete on the land purchase within 28 days and put down a mortgage deposit of 10% of the land price on the day you won the bid.
If you fail to complete on the land purchase within 28 days then you may lose any deposit and other fees you have already paid.
Buying via land agents
You can buy land through land agents which are just like estate agents but for land. The land agent as an estate agent would try to get the best possible price for the land.
Having a mortgage in principle from a land mortgage lender may give you an edge over other potential buyers.
Should you buy land?
Many people see land as an adequate investment because of its ability to rise in value without too much work. All you need after all is the right economic climate, demand for land in the area your land is situated due to new property developments or due to commercial developments and your land could see its value skyrocket.
This isn’t always the case and buying land, as with many other investments can be risky
Do banks finance land?
Yes, there are banks who finance land but you find that most finance for land comes from non-high street mortgage lenders.
Can I get a loan to buy land and build a house?
Yes, you will be able to get a loan to buy land and then build a house on this land. There are several financing options available to you if you want to get a loan to buy land and then build a house.
Some include:
Development finance
Bridging mortgages
Commercial mortgages
How much mortgage deposit do you need for a land mortgage?
Mortgages for land will usually have a higher mortgage deposit requirement than residential mortgages as mortgage lenders view mortgages for land are much riskier than residential mortgages.
You will usually need to put down a larger mortgage deposit of around 30%
How much can you borrow for a land mortgage?
The amount you may be able to borrow for a land mortgage will heavily depend on your individual circumstances. This means how much your annual salary is, what your credit score is and how much monthly disposable income you have.
Most land mortgage lenders will have mortgage multiples of around 3 but you may be able to get a land mortgage for an income multiple of more than 4.
What are the eligibility requirements for a land mortgage?
To get a mortgage for the land you will usually need to meet the same mortgage affordability requirements as a residential mortgage.
Your monthly disposable income
This means you will need to have a monthly disposable income which could cover the monthly mortgage repayments in your land mortgage. If you are struggling to get a land mortgage because you can’t fit the monthly mortgage repayments into your monthly disposable income then you may want to reduce your monthly expenses by refinancing them or simply cutting off costs which you can do without e.g dining out.
Your credit score
You will also need to have a credit score which is relatively good without any bad credit on it. You may be able to get a land mortgage with bad credit but this will be reviewed by most land mortgage lenders on a case by case basis. If you want to improve your ability to get a land mortgage then try building credit.
Your plans for the land
Some land mortgage lenders may also consider what you want to do with the land and based on this they may lend to you or not.
Your mortgage deposit
Another eligiblity requirement for a land mortgage will be your mortgage deposit. Most mortgages for land will require a mortgage deposit of about 30%. If you are struggling to get a mortgage for land then increasing your mortgage deposit could help you get a mortgage for land.
The history of the land
Some land mortgage lenders will also place some restrictions on the type of land they will be able to lend on. If the land has been used for commercial purposes you may find some mortgage lenders will want to know what sort of activities took place there and others will simply refuse to lend on the land simply because it was used for commercial purposes before.
If the land was previously used for activities that involved chemicals then you may find it hard to get a land mortgage for this sort of lands.
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If you are struggling to meet the eligibility requirements for a land mortgage then you may want to consider putting up some collateral to secure the land mortgage further.
A collateral could be savings or a tangible asset such as another property. You should be aware that if you default on your land mortgage then you may lose your collateral.
Can you get a mortgage for land without a mortgage deposit?
Yes, you may be able to get a mortgage for land without any mortgage deposit but most land mortgage lenders will require you to have some collateral which you can use in place of a mortgage deposit.
If you fail to keep up on your monthly mortgage payments and default on your mortgage then your collateral could be repossessed.
Can you get a mortgage on land without planning permission?
Yes, you may be able to get mortgages for land without planning permission but you will likely have to pay a higher mortgage rate.
Most mortgage lenders may prefer you have planning permission in place already before they offer you a mortgage for land.
If you don’t have planning permission then you can also expect to have to put down a slightly larger mortgage deposit and hence you will be offered a smaller loan to value rate of about 65%.
To get a mortgage for land without planning permission most land mortgage lenders will expect you have some history of buying and trading land.
You may find that mortgages for land are broadly defined by those who offer mortgages for land to borrowers who have planning permissions and those which don’t.
You may also be able to get a bridging mortgage whilst your planning permission for land takes place as an alternative to not having any land mortgage.
Getting planning permission can be a very time consuming and complicated matter depending on what you intend to do with the land.
You will usually need planning permission to:
- Build a property
- Extend a property
- Modify a property in any way
Can you get a land mortgage if you are self-employed?
You may be able to get a land mortgage if you are self-employed but this will heavily depend on your ability to prove to the land mortgage lender that you have a stable and reliable income.
Self-employed mortgage borrowers will typically find it hard to get mortgages as they find it hard to prove how much they earn and how reliable their income is to the mortgage lender.
Most land mortgage lenders who offer mortgages to self-employed borrowers will usually request to see your self-employed accounts for at least 3 years. If you don’t have self-employed accounts for 3 years or have not been self-employed for at least 3 years then you may still be able to get a land mortgage but most land mortgage lenders will require you to have been self-employed for at least 12 months.
Most land mortgage lenders will not want to see a long period of unemployment as this may indicate that you find it hard to get self-employed jobs.
If you are a contractor then the land mortgage lender may want to see your day rate to work out what you could afford in monthly mortgage repayments per month.
The documents you may be required to provide if you want a land mortgage and are self-employed will include:
Your P60 tax return form
Your SA302 Tax calculation form
Your CV
Your bank statements for 3 months
An accountants certificate for a mortgage
Your company accounts or self-employed accounts
If you want to get a mortgage for land and you are self-employed then you may want to speak to a self-employed mortgage broker who has specialist knowledge on a mortgage for land.
In most cases, the land mortgage lender will require you to pay an increased mortgage deposit in order to reduce the loan to value rate on the land mortgage and by doing so reduce their risk on the mortgage.
Can you get a mortgage for land with bad credit?
Getting a mortgage with bad credit is hard enough as mortgage lenders will prefer to lend to borrowers who have good credit scores and history.
Getting a mortgage for land with bad credit may be possible as some land mortgage lenders will usually review bad credit land mortgage applications on a case by case basis and lend based on the individual’s circumstances.
Bad credit could include:
Mortgage arrears
Missed credit account payments
Credit account defaults
A CCJ
An IVA
A debt management plan
A bankruptcy
A home repossession
If you want to get a land mortgage with bad credit then you may need to use the services of a bad credit mortgage broker who may be able to assist you in getting a land mortgage.
To get a land mortgage with bad credit you may need to put down an increased mortgage deposit than is usually required. Putting a larger mortgage deposit down will reduce the mortgage lenders loan to value rate and by default reduce the land mortgage lenders risk on the mortgage.
Why do people buy land?
People in the UK will typically buy land because they view it as a viable investment and most people will say that there is a limited amount of land so one way or the other the price of land is going to rise. This, of course, is not always the case. Land price can go up and go down.
Land could be bought by private individuals for residential purposes or by businesses for commercial purposes.
Some people will buy land simply because they want to build their dream homes.
How to get a land mortgage?
If you are interested in getting a mortgage for land then you should speak to a whole of market mortgage broker who could assist you in finding a land mortgage best suited to your circumstances.
land mortgage rates
When searching for a mortgage for land you will find that land mortgage rates are much higher than residential mortgage rates. This is because land mortgage lenders see mortgages for land as being much riskier than residential mortgages.
The factors affecting land mortgage rates include:
- The mortgage deposit you put down will heavily influence your ability to get a mortgage for land.
- The mortgage deposit will also influence the loan to value band you fall in and hence affect the land mortgage rate.
- The planning permissions for the land will also affect your land mortgage rate. Does the land have full planning permissions or are you in the process of obtaining planning permissions
- How do you plan to exit the land
- What do you intend to build on the land? This will influence the kind of land mortgage lenders available to you and the rates they will offer.
- Your credit score and history will affect the kind of land mortgage rates available to you.
- You experience in buying land will affect the kind of land mortgage rates open to you too.
- The size of the mortgage will also affect the mortgage rates available to you
Alternatives to mortgages for land
Getting a mortgage for land isn’t your only option, you may be able to access other sources of funding depending on how long you may need to have the land for or what your plans are for the land.
You may be able to use the below as alternatives to land mortgages:
Bridging loans (this could be a really good short term option to use whilst you get planning permission if most land mortgage lenders won’t lend to you without planning permission, they have high APRs, need exit strategies and you can exit them by remortgaging onto a land mortgage)
Commercial mortgages
Development finance
Can you use a commercial mortgage for land?
Yes, you may be able to use a commercial mortgage for land if you plan to develop a commercialmrperty on the land but the rates you will be offered will be slightly higher than the mortgages you will be offered on commercial mortgages for a property. The loan to value rates offered on commercial mortgages for land will also be around 50% Loan to value.
Can you use development finance to purchase land?
Yes, you may be able to use development finance as an alternative to a mortgage for land. Development finance lenders will expect that you will carry out and oversee the development yourself. They will usually provide you about 100% of the constructions costs (released in stages) and 70 to 85% of the land purchase costs.
Most development finance lenders will want to know how you will exit the development finance loan. This could be through a remortgage to a residential or commercial mortgage or the sale of the developed property.
Can you get a self build mortgage to buy land?
Self-build mortgages may be an alternative to mortgages for land.
Self-build mortgages will usually have higher mortgage rates than residential mortgages and they can provide u to 100% of the development costs.
The funds will be released in stages as you hit your development milestones.
Getting a farmland mortgage
Farmland mortgages are also possible and you will be able to get a mortgage for land if you have any property that has agricultural needs.
Land mortgage calculators
You can use land mortgage calculators to see what you could potentially afford when dealing with land mortgages.
You should be aware that land mortgage calculators don’t look into your mortgage affordability in detail and a land mortgage broker may be able to help you analyse your lending options further.
How to get a land mortgage
If you want to get a mortgage for land then speaking to a land mortgage broker may be one of the options available to you.
A land mortgage broker will be able to help you analyse your mortgage options in more detail and let you know what land mortgage lenders may be willing to lend to you based on your circumstances.
Mortgages for land are also a bit of a specialist area of the mortgage market and therefore a land mortgage broker may be able to help you with any complex issues you may face
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.
