Land Purchase Finance

Whatever your plans, you may find lenders reluctant to help. Many of the best-known names in the lending industry will simply not lend on land. Nonetheless, land finance does exist. By understanding the various types of finance available, and the lenders who may provide it, Rangewell can help you find the funding you need.

What is a land loan?

Many of us dream of building our own homes. A standard mortgage cannot provide the funds you need, as it can only be secured by a finished, habitable property.

A self-build mortgage is simply a loan taken out on a property which you are in the process of building yourself.

Funds are given to you in stages rather than as a single lump sum. This is to reduce the lender's risk and ensure that the money is spent as planned so you don't run out when you are only halfway through the project. The money for each stage is usually only paid out once it has been completed and a valuer has visited the site. However, it may be possible to use the first stage to buy land.

What are the land loan requirements?

If you're buying a piece of land to build your home, you'll need a self-build mortgage. This type of mortgage can be used to cover the purchase of your land and the cost of building your new property. To ensure you remain on a budget and that funds are spent sensibly, the overall amount you secure through a self build mortgage is released in batches, usually depending on whether a particular element of the build is about to start or has been completed.

You'll typically need a 25% deposit based on the build to get started, but it might be possible to find lenders that require at least 15%. A detailed costed plan of your build will also be required. They'll also likely want to see proof of your earnings, and a good credit score will help secure approval. 

How much can I borrow?

All lenders will have different criteria when it comes to lending. Our mortgage and specialist lenders can offer the most favourable rates. They can provide you with bespoke advice, help you with your paperwork, and potentially save you time and money by introducing you to the right lender the first time. 

How much will it cost?

Land loans are typically more expensive because they do not contain a home or dwelling. When someone purchases land, they are likely already renting or have a mortgage payment of their own. 

Most land-based mortgages have a 70% or less loan-to-value ratio, making it necessary to raise 30% of the land price as a deposit. 

What type of finance is available to buy land?

Here are some examples of the different finance options available to buy land. Speak to the experts at Rangewell if you require additional information. 

Commercial Mortgages

A commercial mortgage can be used to buy land, although it may be most suitable for land with the potential for commercial development. Commercial mortgages operate much like residential mortgages and are, simply, a large loan secured on the property itself. Generally, Commercial mortgages are for 15 years or more and, as with a residential mortgage, the premises will be at risk if you are unable to keep up your repayments.

The rates and terms for a commercial mortgage are arranged individually. Lenders will look at your business, your accounts and projections to ensure that and set interest rates based on the level of risk they believe it presents. There will also be valuation, arrangement and legal fees, and additional costs for the services of professional advisors which will add substantially to the initial costs.

Because of the legal and administrative costs of setting up a commercial mortgage, there are minimum lending levels. Few lenders will consider applications for less than £50,000, but there is no set upper limit. So, if your plans are large-scale, perhaps for major commercial or residential development, it may be possible to negotiate a Commercial mortgage to provide for a large proportion of the land costs as part of a wider funding package.

Commercial mortgage deals can be either fixed-rate or variable rate, and you may also be able to choose between a repayment mortgage option where you pay the capital and interest back each month or an interest-only mortgage, where you only pay the interest. If you choose this option, the lender will seek evidence of an appropriate investment policy that will cover the outstanding capital at the end of the loan term.

Property Development Finance

Property development finance is a type of lending that experienced property development businesses can use to fund new building projects including ground-up new builds.

Lenders may advance up to 70% of the gross development value, with terms that can be up to 24 months. Property development finance is usually only available for experienced developers, who have a portfolio of previous development projects to showcase their skills.

Bridging and Auction Finance

Bridging finance is a short-term finance solution best thought of as the means to bridge a funding gap until a more suitable long-term solution can be provided. It is versatile and can be used to secure a land purchase deal which would then be transferred to a long-term solution. Bridging finance has a relatively high-interest rate and is, therefore, unsuitable for the long term where it would mean high costs if used for a long period.

Auction finance is a way of arranging funding in advance of an auction. Like a bridging loan, it is designed to provide short-term finance. It can help you ensure that you have funding in place if you are successful at auction, and can be valuable to help you know how much you can bid on a particular plot.

Agricultural land

Demand for agricultural land may be growing. An agricultural mortgage is designed to help farmers buy farmland or other holdings such as a forest.

You can usually borrow up to 80% of the value of the land and repayments can be arranged to fit in with your business cash flow, either monthly, quarterly or annually.

Loans can even pass from generation to generation – helping you build a farming business, not just for yourself, but for your family in the years to come.

There will be valuation, arrangement and legal fees to consider.

Buying your existing farm tenancy and becoming a freeholder can be a sound investment, and one that some landlords are increasingly becoming receptive to. You can borrow up to 60% of the full value of freehold land, which your tenanted farm will become, on completion of the sale

Raising funds with refinance

If you currently own land or property, property remortgaging or refinancing could let you use it to raise cash. Refinancing lets you access the investment you have already made in your property to provide the funding, which can be used for a number of purposes, including buying your own land. It works by providing a new commercial mortgage on your existing property. If you own the property outright, all the money you raise is yours to use in any way you wish. You regain full title to your premises when the funds are paid off and you could take advantage of rates that are exceptionally low.

Refinance can also be the solution if you want to get a better deal on your existing financial commitments. You do not need to have paid off your current mortgage to arrange a new one. Your land may have appreciated in value, which may allow you to negotiate better terms than an existing loan.

What are the pros and cons of land loans?

Land loans allow borrowers to purchase land without paying 100% of all the cost out of their own pockets. This gives both home buyers and businesses more flexibility in where they may choose to build. However, buying land comes with a whole set of challenges that you probably won't have when buying a pre-existing building.

Pros

• Opportunity to build the perfect dream house
• Undeveloped land can be inexpensive
• People can secure land now for a future build in an area with increasing prices

Cons

• Typically a requirement for a higher down payment, usually 50% of the purchase price
• Higher interest rates
• Fewer lenders on the market
• Higher monthly payments due to shorter repayment terms
• More considerations than a traditional mortgage due such as needing to finance home construction in the future

Benefits of land finance from Rangewell

At Rangewell, we work with lenders from across the entire market. It lets us ensure that you have the financial solutions you need.

Even a fraction of a percentage point can make a substantial difference to what you actually pay each month, while fees and penalties can complicate the position still further. There are many different lenders who may be prepared to offer funding. Each has their own approach to interest rates and fee arrangements, and comparing offers needs an expert eye.

At Rangewell, we know the lenders who can offer land finance along with other types of finance for property developers, including property development finance, and use our expertise to identify the deal that really is the most appropriate for you and your business plans. Our knowledge can not only help you secure the funding you need - it can save you and your business a great deal of cash.

ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.