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Land Purchase Finance

Published on 16th August 2019 - Last update on 29th June 2020

Whether it’s for residential or commercial purposes, land ownership offers a variety of benefits to both business owners and developers alike. However, with the market continuing to grow in value, mustering enough cash to support a land purchase isn’t always straightforward. Yet instead of relying upon your own savings, there is another way to achieve your goals. Land Purchase Finance offers you a variety of ways to finance a land purchase and spread out the costs involved, making the transaction more manageable. So if you’re hoping to purchase land for your business, this is what you need to know about Land Purchase Finance.

Why should I finance a land purchase?

Land is a valuable resource for many business owners, but the costs involved can push it out of your reach. Yet even if you do happen to possess the necessary funds, making an upfront purchase can punch a hole in your finances which may incur lasting consequences. This is why many UK business owners and property developers choose to spread out the expense across either a short or long-term agreement by applying for Land Purchase Finance. So regardless of whether you’re looking to build your own factory, construct affordable housing, acquire farmland or open a new car park, Land Purchase Finance could offer you the support your business needs to make it happen.

Thinking about purchasing land for your business? Need help raising the necessary capital? Apply for Land Purchase Finance or learn more about how your business could benefit

What does Land Purchase Finance have to offer?

One of the greatest aspects of Land Purchase Finance is the flexibility that it offers. Rather than eroding your own savings, which can cause problems later in your development, you can choose to finance a Land Purchase using either a Commercial Mortgage or Bridging Loan. But in order to make an informed decision, understanding how these two different products operate is essential.

Commercial Mortgage

If you’re looking for a mortgage to purchase land, Commercial Mortgages are secured, long-term products that can be established for a term of up to 20 years. They’re typically secured against land or property which, in this case, will be the land that you’re purchasing. Plus, although Commercial Mortgages aren’t subject to a set borrowing limit, they offer up to 80% Loan-to-Value (LTV) according to the land’s total purchase price.

Yet in order to qualify, the mortgage provider will require you, as standard, to make an upfront downpayment, which typically starts at 20% of the land’s purchase price. This is used to form part of the sum that goes towards buying the land from the seller and, from the mortgage provider’s perspective, gives you a greater impetus to keep up with the arrangement. As such, if you’re looking to save money and gain a favourable interest, you may want to consider providing up to 40% instead, which also reduces how much you’re borrowing.

Once this has been paid and the agreement established, you’ll be required to make Fixed Monthly Repayments to the mortgage provider, plus interest. However, the amount of interest you’re charged may vary according to market interest rates depending you’re using a Fixed or Variable Rate mortgage agreement.

Bridging Loan

Another way of supporting a land purchase is with a Bridging Loan, which can offer up to 100% Loan-to-Value (LTV) depending on the land that you’re purchasing. Designed to be a short-term commitment, they can be arranged on a term ranging anywhere between 1 - 12 months and are secured against the land in question, and/or another property in your possession. As such, lenders will want to know how you intend to repay the agreement on time, which is usually achieved through a sale of assets (e.g. property) or funds from another finance agreement.

Yet nevertheless, what you must appreciate is that Bridging Loans operate by treating the Principal (capital borrowed) and the interest accumulated as two separate aspects of the agreement. Therefore, the first step to take before placing an application is to decide whether to use an Open Bridge or a Closed Bridge.

  • Open Bridge: doesn’t tie you down to an exact date, but does require the agreement to be fully repaid within an agreed term (e.g. 12 months)
  • Closed Bridge: requires the agreement to be fully repaid by a set date, determining the length of the term.

From here, you now need to decide on how the interest is handled until the agreement matures and is fully repaid. To do that, you have 3 options to choose from which are: Pay Monthly, Rolled-Up Interest, and Retained Interest.

  • Pay Monthly: At the end of each month, you’re required to make interest payments to the lender.
  • Rolled-Up Interest: The total amount of interest incurred is combined with the Principal (capital borrowed) as a single repayment and is made payable when the agreement reaches maturity.
  • Retained Interest: This allows you to borrow the interest that you’ll incur for an agreed number of months. However, this is retained by the lender and is also subject to interest. This is used to offer you a safety net as you make monthly interest payments to the lender. Plus, if you haven’t used up all of the interest that’s been retained, or you’ve managed to resolve the agreement early, the lender may reimburse a portion of these funds to your business.

How can I support a major land purchase?

However, if you’re an established company looking to purchase a substantial amount of land for a major project (e.g. to build a large factory or airport), another way of achieving your goal could be through Mezzanine Finance. Mezzanine Finance is a cross between Debt Financing and Equity Financing and is highly customisable. As such, the agreement you could receive will be unique and is subject to your ability to negotiate a suitable arrangement with the lender(s).

A great way of borrowing a large amount of capital, the amount of funding that you receive from a Mezzanine lender is subject to a given project which, in this case, is the desired land’s total purchase price. Plus, although this type of lending usually carries a high rate of interest, Mezzanine Finance agreements are often established on 5 or 6-year terms. However, this depends on how successful your negotiation strategy is, so can be longer or shorter.

In addition, you’ll need to decide a suitable repayment strategy which, again, is subject to negotiation. Although there are number ways a Mezzanine Finance solution could be resolved, two of the most common repayment methods are Fixed Monthly Repayments and Rolled-Up Repayment.

  • Fixed Monthly Repayments: Repay a set amount of capital each month to the lender(s), plus interest.
  • Rolled-Up Repayment: The Principal (capital borrowed) is combined with the interest incurred and repaid in a single repayment when the agreement matures.

Need help purchasing land for your business?

Purchasing land in the UK can be a great way to invest in the future of your business. However, the price tag that often comes attached can often prove a formidable obstacle to overcome, causing many business owner to delay or abandon their goals. Fortunately, there are a number of ways that you can gain the support you need to succeed. All you need to do is source an agreement that’s most suitable for you.

At Rangewell, we’re an Access to Finance specialist who’s mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the entire application process to give you the best chance of being successful. So if you’re looking to purchase land for your business, apply for Land Purchase Finance today or find out more with Rangewell.

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David Harrison

David Harrison

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