Using Your Land Equity For A Construction Loan

Are you planning on building a home on vacant land you’ve bought? A land equity loan can help you complete the build. You can use the equity you’ve built up in your vacant land as a deposit for a construction loan.

How Much Can I Borrow For A Construction Loan?

Using the equity in your land for a construction loan, you may be able to borrow up to:

• 95% of the construction costs: You’ll need to be in a strong financial position, including having a perfect credit history, regular income and genuine savings.
• 80% of the value of the land plus construction costs: Most banks do not lend for cost plus building contracts so the key is to apply with the right lender.
• Borrow up to 100% with a guarantor loan: You can borrow the full costs of construction if your parents are happy to act as guarantors on your construction loan.

We have mortgage brokers who specialise in construction loans.

Please speak with one of our credit specialists by calling us on 1300 889 743 or complete our free online assessment form and one of us will contact you instead.

What Information Do I Need To Provide The Banks?

You’ll need to provide the lender with a valuation of the land (at your own cost) and mention how long ago you purchased it.

If you have a valuation already, lenders may still require another valuation depending on how recently it was done.

Getting Approved For A Construction Loan in Australia

A full construction loan guide with common mistakes and how they can be avoided.

What Are The Risks Involved?

With a land equity construction loan, your borrowing power is the main element that’s at risk.

Banks use the valuation figure of the land value plus the cost of construction as the total purchase value.

This means that the amount you can borrow depends a lot on the land valuation.

For instance, let’s assume you’re planning on building on land that you already own.

The land is valued at $80,000 and you work out the cost of construction is going to be $300,000.

In total, you need to borrow $380,000.

Since the total purchase price will be the land value ($80,000) plus the costs of construction ($300,000), or $380,000, you would actually need to borrow at least 92%.

If the land value is higher, for example $90,000, the total purchase price becomes $390,000, dropping your Loan-To-Value Ratio (LVR) to 89%.

In this way, you get approved with more lenders and also save thousands of dollars on Lenders Mortgage Insurance (LMI). LMI increases sharply if you go over 90% LVR.

If the land value is lower, for example $70,000, the total purchase value becomes $370,000 increasing your loan amount to almost 95% LVR.

So why choose a land equity construction loan?

• Instead of taking time to save up a deposit, you can use the equity from the land to build your dream home sooner.
• The land value is what makes up most of the property value. Depending on many factors, the land value could have increased from when you first bought it.

Should I Invest All Of My Savings Into Vacant Land?

If you’re planning to build on land you already own then you can put all of your savings into the land and build.

This is because you can increase the land value by investing more on it and take out a land equity construction loan when you build.

If you’re buying land and you have no intention to build within 12 months of settlement, it may be a better option to hold onto your savings since they are much easier to access than equity.

When purchasing land, you need to meet the following requirements to ensure you’ll be able to access the equity at a later stage:

• Location: It’s important to choose a location that is either in a major city or town or at least close to one.
• Services: The land must be connected to the electricity grid and have access to town water or tank water as well as sewerage services.
• Size: The land must be no larger than 50 hectares – only a few lenders will consider land sizes larger than this.
• Access: There needs to be easy access to the land via a road. As long as it’s well maintained, dirt roads are usually ok.

Disclaimer:The above must not be taken as financial advice. Please speak with a professional financial advisor before you make a decision.

Do You Need A Land Equity Construction Loan?

Our credit specialists have many years of experience in the mortgage industry.

We have mortgage brokers who have dealt with numerous construction loan applications including people who are borrowing against land equity.

Tell us about your situation and loan needs by calling us on 1300 889 743.

If you’d like one of us to contact you instead, you can enquire online for free, and we’ll get back to you in 24 hours.