Why Property Investors Consider Vacant Land
If you're looking to expand your property portfolio, purchasing vacant land might be on your radar. Many property investors see the appeal - you can build exactly what you want, choose your location strategically, and potentially capitalise on future growth. However, securing finance for vacant land works differently compared to purchasing an established property.
Understanding these differences before you apply for a home loan can save you time, money, and potential disappointment down the track.
How Home Loans for Vacant Land Differ
When you're buying an established home, lenders generally feel more comfortable because the property already has value they can assess. With vacant land, there's no dwelling to use as security, which makes lenders view it as higher risk.
This increased risk typically means:
- Higher interest rates compared to owner occupied home loan products
- Larger deposit requirements (often 20-30% of the land value)
- More stringent application criteria
- Potential Lenders Mortgage Insurance (LMI) costs if your loan to value ratio (LVR) is considered high
- Limitations on certain home loan features you might expect
Some lenders won't offer finance for vacant land at all, which is why having access to home loan options from banks and lenders across Australia becomes crucial for investors.
Variable Rate vs Fixed Rate for Land Purchases
When comparing home loan products for vacant land, you'll need to decide between a variable interest rate, fixed interest rate, or split loan structure.
Variable Rate Loans
A variable rate means your interest rate can move up or down based on market conditions. The benefit here is flexibility - you can usually make extra repayments to build equity faster, and you might have access to features like an offset account or linked offset. Variable home loan rates can also decrease if the market shifts in your favour.
Fixed Interest Rate Home Loans
With a fixed rate, your interest rate stays the same for a set period (typically 1-5 years). This provides certainty around your repayments, which can help with budgeting and planning your next investment move. However, fixed loans often come with restrictions on extra repayments and may not offer the same home loan features as variable products.
Split Rate Options
A split loan lets you divide your loan amount between fixed and variable portions, giving you some certainty while maintaining flexibility. This can be particularly useful if you're planning to build on the land soon and want to manage your cash flow carefully.
Interest Only vs Principal and Interest
As a property investor, you'll also need to decide between interest only and principal and interest repayments.
Interest only loans mean you only pay the interest portion each month, keeping your repayments lower in the short term. This can help with cash flow, especially if you're managing multiple properties or planning to build soon. However, you won't build equity during the interest only period, and you'll eventually need to switch to principal and interest repayments.
Principal and interest repayments mean you're paying down the loan amount from day one. While this means higher repayments initially, you're building equity and working towards owning the land outright. For investors focused on long-term wealth building, this approach often makes sense.
Understanding Your Borrowing Capacity
Before you start looking at vacant land opportunities, it's worth understanding your borrowing capacity. Lenders will assess your income, existing debts, living expenses, and the value of the land you want to purchase.
For vacant land, lenders are typically more conservative. They might lend less than they would for an established property, even if your financial situation is identical. Getting Home Loan pre-approval can give you a clear picture of what you can afford and strengthen your position when negotiating with sellers.
Calculating Home Loan Repayments
Knowing what your repayments will look like is essential for planning your investment strategy. When calculating home loan repayments for vacant land, consider:
- The loan amount you need
- The interest rate you're likely to secure (remembering land loans typically have higher rates)
- Your intended loan term
- Whether you'll opt for interest only or principal and interest
- Any additional fees or LMI costs
If you need lower repayments initially, an interest only structure might work, but remember this is temporary. Planning for the eventual switch to principal and interest will help you achieve home ownership and financial stability over time.
Using an Offset Account to Your Advantage
If your home loan package includes a mortgage offset or offset account, this can be a powerful tool for property investors. Money sitting in your offset account effectively reduces the interest you pay on your loan amount, even though you can still access those funds whenever needed.
For vacant land loans, not all home loan products will include this feature, particularly if you're on a fixed interest rate home loan. When you compare rates and home loan packages, factor in whether having an offset account is important for your investment strategy.
Planning to Build? Consider Construction Loans
If you're purchasing vacant land with plans to build, you might want to explore construction loans instead of a standard land loan. Construction finance works differently and is structured to release funds in stages as your build progresses.
Some lenders offer portable loan options, where your initial land loan can transition into a construction loan and then convert to a standard home loan once the build is complete. This can simplify your financing journey and potentially save you money on application and establishment fees.
Access to Multiple Lenders Makes a Difference
One of the biggest challenges with vacant land purchases is that many lenders have different policies. Some won't touch vacant land at all, while others specialise in it. Interest rate discounts, rate discount offers, and available home loan features can vary dramatically between lenders.
Working with a broker who can access home loan options from banks and lenders across Australia means you're not limited to one lender's policies. You can compare rates, assess different home loan packages, and find loan products that align with your investment goals.
The Role of LMI in Land Purchases
Lenders Mortgage Insurance (LMI) protects the lender if you default on your loan. With vacant land, you'll often need a larger deposit to avoid LMI, typically around 30% of the purchase price. If you can't provide this deposit, LMI costs can add thousands to your upfront expenses.
For property investors, paying LMI might still make sense if it means securing a valuable piece of land that fits your strategy. The key is understanding the cost and factoring it into your investment calculations.
Improving Your Position as a Borrower
If you're serious about purchasing vacant land, there are steps you can take to improve your borrowing capacity and secure more favourable current home loan rates:
- Reduce existing debts where possible
- Build your savings to increase your deposit
- Maintain a solid credit history
- Document your income clearly, especially if you're self-employed
- Have a clear plan for the land (even if it's a long-term hold strategy)
These actions demonstrate to lenders that you're a responsible borrower, which can lead to better interest rate offers and loan terms.
Investment Loans for Land Purchases
If the vacant land is purely for investment purposes, you'll be looking at investment loans rather than owner occupied products. Investment loan rates are typically higher than owner occupied rates, but the interest is generally tax-deductible, which can help offset the cost.
Understanding the tax implications and how vacant land fits into your broader investment strategy is important. While we focus on helping you secure the right finance, speaking with your accountant about the tax side will help you make informed decisions.
Taking the Next Step
Purchasing vacant land as a property investor requires careful planning and the right finance structure. From choosing between variable rate and fixed rate options to understanding your loan to value ratio requirements, there are many factors to consider.
At Mortgage Path, we work with property investors to find suitable home loan products that align with your investment goals. Whether you're looking at your first land purchase or adding to an existing portfolio, having someone who understands both the lending landscape and investment strategies can make a significant difference.
Call one of our team or book an appointment at a time that works for you. We'll help you explore your options, compare rates from multiple lenders, and work towards securing finance that supports your property investment journey.
