Register Quarterly Newsletter

Vacant Land / Construction

Purchasing your own piece of land and building the house of your dreams can be one of life's most rewarding experiences provided you prepare carefully and seek information before you commit yourself.

Most Lenders will have different policies when it comes to providing funds to purchase vacant land as well as construction. In the case of some Lenders, they will not provide any finance for construction at all.

There are three main ways to go about this type of purchase.

1. Buy the Land Now, Build Later

When purchasing this way, timing is important. The Lender will want to know your expected time frame for the commencement of the construction. Will it be 6 months, 12 months, 2 years?

This will determine the type of "Loan Product" they may offer you. For example, some lenders will only offer an "Investment Loan" if you have no plans to commence building within a specific period. They may also increase your interest rate if your construction commencement date is delayed for any reason. It is important to also find a Lender who will provide construction finance when it comes time to build, preferably by increasing your existing loan so that you do not have too much extra to pay in the way of additional bank and government fees. There are some Lenders who will provide finance for vacant land but do not provide construction finance, which means that you will need to completely refinance your loan when you are ready to build.

The amount of money a Lender will provide for vacant land may also vary. For example, most Lenders will only advance 90% of the purchase price for vacant land if you do not have immediate plans to build.

Other matters to keep in mind when purchasing vacant land are things such as Zoning, Easements, Connection of Services (such as town water, sewerage, electricity, phone etc. as these may add substantial costs when it comes time to build), Soil Tests and Drainage / Flooding issues

2. Buy the Land Now and Build Now

Talk about timing being important!

If you are looking to have a Lender provide unconditional approval for both land purchase and construction at the same time, you will need to have your house plans prepared, as well as a fixed price quote and full building specifications available before you apply for finance.

This allows the Lender to adequately determine the expected value of the property at the end of the construction. The Lender will need to know this value as part of their assessment process. They will also need to know what the finished product is expected to be.

This process is most often organised by property developers where the property developers also have arrangements with various builders within the estate.

Lending may be available to a maximum of 95% of the expected value of the property on completion of construction.

3. You already own your land and want to be an Owner Builder

Obtaining finance as an Owner Builder can be very difficult due to the historical fact that most Owner Builders experience some form of difficulty in completion of their projects. The most common problem is going over budget (running out of money). Other problems such as extended time delays or not being able to perform the work to meet building inspections are also common. With this in mind, Lenders will generally be more cautious when it comes to lending money to Owner Builders.

Most lenders will only lend up to about 50% of the expected value of the property at the end of the construction. This means that if you are considering this option, you will need to have a much larger cash contribution available than you would need if you were getting a registered builder to build the house for you.

You will also need to provide the Lender with detailed plans, written quotes and costings for the entire project.

Valuations

As mentioned previously, the Lenders will need to see details of the proposed construction to enable their Valuers to establish the market value of the house on completion of construction.

Valuations will sometimes come back less than the actual cost of the construction. This is often the case in brand new estates as there are no established sales of completed houses in the area for the Valuer to gain a comparison.

Detailed plans, Specifications, Fixed Price Quote and Council Approved Plans can help to increase the valuation.

Rateable value of land is not a solid indication of land value. The market value is often higher, but it can also be lower - eg. contaminated land values are lower than rateable value

Where a display home exists in the estate, the on-completion valuation is more likely to be closer to contract value.

Stamp Duty

For Stamp Duty purposes (in Queensland), purchasing land is seen as an INVESTMENT and higher stamp rates will apply, however there is no stamp duty payable on the cost of the construction.

See Stamp Duty for calculations or more information.