Construction and vacant land loans
If you’re looking at building or buying a recently built property you’re going to need help sorting through the complex processes of purchasing the property and getting the right loan.
The loan(s) you may need depend on many factors and it’s a good idea to speak to a mortgage broker to understand your options.
The three most common processes for construction and vacant land loans include:
- Buying off the plan
- Buying a house and land package
- Buying land and building a property
Buying off the plan
Buying off the plan is the purchase of a property or unit that has not been built yet. You are essentially deciding to buy based on the developers plans for the property. When you purchase off the plan you sign a contract for an amount you will pay once construction has completed.
When purchasing off the plan you have to put a 5-10% deposit and then pay the remainder on completion of construction. In most cases, buyers will get pre-approval when they are shopping around for the property and then organise the final loan in the months before the anticipated completion date.
How do I get a loan for buying off the plan?
In most cases, buying off the plan is a single contract sale so the process to get a loan is similar to most standard property purchases. However, you’re going to have to pay attention to a few extra details:
Your initial deposit of 5-10% will have to be funded through savings or equity from your existing home loan. You can also organise a deposit bond and keep things simple, as a deposit bond doesn’t require you to part with any of your savings. This deposit will be required once you sign the contract to purchase the property, regardless of when construction is anticipated to be completed.
You will have to pay stamp duty exemptions on the full contract price when you agree on the purchase price. However there are stamp duty exemption for first home buyers in some states. Most builders pay stamp duty on the land they have purchased to build on so they may factor that into the total price of the property, meaning you may be paying stamp duty twice.
Even if the developer does not anticipate completing construction on the property for months or even years, you should organise a pre-approval before you sign anything. A pre-approval will give you the confidence you need that a bank has done a full assessment on your financial situation. The loan you select should match your financial goals.
Tips for choosing a loan for buying off the plan.
- Be aware that the interest rate on the product you select may change from the time you get pre-approval to the time you settle on the loan.
- Although you should select a loan that best matches your financial goals, you can potentially choose a different lender or product closer to settlement.
- It’s okay to let your pre-approval expire during the time you wait for your property to be built. Your broker can easily reapply for the loan again.
The waiting period before construction finishes
In your contract of sale, the builder will estimate a date the property will be completed and ready for you to move in. In the time before then, there isn’t much for you to do besides preparing to move into your new property and keeping your finances tidy.
A few weeks before property settlement - the valuation
In the few weeks before your property settles, the lender you choose will do a valuation to determine the completed value of the property you’ve agreed to purchase. The valuation amount and how it compares to the contract price are very important in determining your Loan-to-Value (LVR) ratio.
How do banks determine your LVR when buying off the plan?
Banks will use either the valuation completed just before the property is released or the contract of sale that you signed when you agreed to purchase the property. In most cases banks will choose the amount/price/value that is lower as the basis to calculate your LVR. However some lenders have special clauses that allow you to use a valuation if that amount is higher.
What happens if your property valuation is less than your contract price?
If the banks valuation is less than the price you agreed to pay the developer, your Loan-to-value ratio may be higher.
If your valuation isn’t satisfactory you should consult with your mortgage broker who may be able to find another lender and valuer who may offer a higher valuation.
As an example:
Daisy signed a contract of sale to purchase an off the plan apartment for $500,000 from a developer in 2014. At the time she was anticipating a loan amount of $400,000 and a LVR of 80%. In late 2015 the property construction finished and the valuation from the bank came in at $450,000 ($50k less than the contract price). If the bank used the lower valuation instead of the contract, Daisy would have a LVR of 88% and would have to pay Lenders Mortgage Insurance (LMI)
What happens if your contract price is less than your property valuation?
If the banks valuation of your property is higher than the price you agreed to pay the developer, the bank may select the lower amount in the contract of sale for your LVR. Although your LVR is what you anticipated, it’s good news that your property is potentially worth more than you paid for it and you may have options for refinancing or accessing equity in the future.
As an example:
Samantha agreed to purchase an off the plan apartment for $300,000 from a developer in September 2014. At the time she was anticipating having a loan amount of $200,000. In March 2015 the property construction finished and the valuation from the bank came in at $400,000. The bank determined Samantha’s LVR based on the original contract of $300k and her LVR was 66%.
Getting your loan organised after the final valuation
Once your lender has the valuation, you will have to complete your loan transaction. Depending on how much time has passed since you got your original loan approval, you may want to review your financial situation and goals with a mortgage broker to confirm the loan you originally selected is still suitable for your situation.
In summary here are some things you need to know about buying off the plan:
- Depending on the state you live in and the property price, you may be eligible for government grants and concessions. See our stamp duty calculator for the latest offers in your state.
- The contract or agreed price you pay is for the final completed product, unlike construction loans where you are paying in installments to complete the property to your specifications.
- When you buy a property off the plan you may be limited in altering the construction of the property and its features - rooms, layouts, colours etc.
- Be aware of any costs included in the contract such as commissions to an investment agent - these costs can inflate the contract price’s comparison to the valuation and this will affect your LVR.
- In some instances it can be beneficial to sign a contract years before the property is due to be completed because the property valuation at the time will be based on current market values.
- Buying off the plan is usually purchasing a unit, townhouse or home that has yet to be completed. It is a single contract purchase, where you are not making progress payments on the construction of the loan.
Buying a house and land package
Buying vacant land and building a home on it is the ultimate experience for someone looking to have their dream property - you can watch your home grow from dirt and grass to a property full of features you’ve chosen or designed.
As grand as your aspirations can be, there’s some big things you need to consider and important parts of the process that can be costly if you’re not aware of them.
When you buy a house and land package you’re buying the land from the developer and you’ll sign a construction contract with a builder to complete your home. In most cases the builder and the developer work together, which means the builder isn’t purchasing the land and paying stamp duty. What this all means is the cost of the final product is pre-determined and includes site variables.
What are site variations?
Site variations are extra construction costs specific to the land you’ve bought. When you buy a house and land package you won’t have to worry about these items as they should be included in your fixed price contract. Site variations may include:
- Bushfire prevention
- Acoustics - to reduce sound noises
- Sloping sites, if the land needs to be altered to suit the house
- Sewer location, which can impact designs
- Soil classification which determines the type of concrete slabs needed
Buying land and choosing a building on your own.
You can choose to purchase the land directly from an agent or developer and then select your own builder. The main advantage is that the purchaser has a greater choice of builders and designs.
However, the biggest disadvantage of choosing your own builder is that you won’t have a guaranteed fixed price property.
How to pay for the land
When you buy the land, you’ll pay a 5-10% deposit upfront and will have to pay stamp duty on the cost of the land. This is the only time you will need to pay stamp duty and one of the biggest advantages of building your home - because stamp duty is only paid once and on the price of the land. There are stamp duty exemptions for first home buyers, second home buyers and investors that are purchasing land. These vary from state to state and your mortgage broker can tell you what may apply to you.
Your deposit must be paid from either savings or from a deposit bond, which can be secured from any existing equity you have. The remaining balance you owe for the land will be paid either 14 days after the land is registered or if it’s already registered, 56 days after the contract of sale has been signed.
What is registered land?
Registered land is when a subdivision has occurred and the block is registered with land titles. If you’re purchasing off a developer, in many cases the land is unregistered and in the process of sub-division. If you’re purchasing the land from an private vendor, it may be already registered as a stand-alone block.
Pre-approval for buying land
It’s highly advisable to get a pre-approved loan before you start shopping for land. Pre-approval will give you an exact figure you can spend on land after a lender has fully assessed and reviewed your financial information. In most cases it’s no issue if your pre-approval expires before the land you purchase settles as your broker can easily re-apply for loan approval and work towards settling your loan on the date you need.
The type of loan you select will largely depend on what you want and time frames. It the land is registered the land and construction loan can be done as one application whereas if the land is unregistered you will need two loans for the land and construction of the property.
How to pay for the building of the property
If the land is registered
If the land is registered you will need only one loan. Once the land is your property and settled, you will begin making mortgage repayments against the land loan amount. As construction starts on your property the bank will make progress payments to the builder and your mortgage repayments will go up each time a progress repayment is made. In most cases there are 4-6 progress stages in the construction of property before it is completed.
Once your property is completed you will be making loan repayments on the full amount of your construction costs and land.
If the land is unregistered
If the land is unregistered you will need separate loans. First you will need to organise the loan for the land and once the land has settled, you will begin making mortgage repayments against the land loan amount. The loan you need for construction should be applied for once you are ready to commence construction on the land. After a construction loan has been approved the lender will issue an ‘Authority to Commence Construction’ to the builder who will start the construction of your property.
As construction starts on your property the bank will make progress payments to the builder and your mortgage repayments will go up each time a progress repayment is made. In most cases there are 4-6 progress stages in the construction of property before it is completed. During this time you will also be making repayments for your land loan.
Once construction is completed your mortgage broker will refinance your land and construction loans into a single loan. The biggest advantage of doing this is that you may see an increased valuation based on a completed property value rather than the construction amount.