There is little doubt about the fact that land is one of the most valuable assets that one can own today.
It is commonly regarded as a non-depreciable asset, which means that its value does not normally reduce or “depreciate” over time.
Thus, if you find yourself in a financially challenging situation, you can sell the land asset to get a return on your investment.
In most cases, you can repurpose the land to use it in any way that seems profitable. You can build a house, develop an agricultural area or even establish a commercial property on it.
Unfortunately, many people are sceptical about buying such an asset since getting a mortgage for land can seem to be fairly complicated.
But there is no need to worry, as in this guide we’ll discuss all the details about land mortgages to help simplify the process.
So, if you are interested in buying land via a mortgage, read on!
Table of Contents
How Does A Mortgage For Land Work?
The basic principle behind a land mortgage is the same as any other type of mortgage. You apply for the mortgage via a suitable lender, who then performs several financial checks before approving it.
However, there is one fundamental difference in how land mortgages work with respect to a standard residential mortgage, for instance.
In the case of the latter, the mortgage applicant purchases a pre-built property (a house) that comes with the land.
As such, the lender knows what the purpose of the asset is and the value of the asset built on the land. This reduces the financial risk, which is why standard mortgages can be easier to obtain.
That is not the case with land mortgages, though, which involve a fair amount of uncertainty. A simple portion of land does not have any predefined use until the buyer repurposes it after purchase.
Naturally, this increases the financial risks for the lender since they don’t know what the land asset will be used for.
Because of this reason, many regular lenders do not provide mortgages for land. Fortunately, there are a few specialised lenders that may be willing to approve such a mortgage.
Even then, you will need to provide enough proof of affordability to assure the lender.
Different Types Of Land Mortgages
There are different types of land mortgages available depending on how you intend to use the purchased land.
1. Agricultural Mortgage
If you wish to use the land asset for farming purposes, then this is the type of land mortgage you should get.
You can develop the land into dedicated farmland for irrigation, or you can build barns, stables and other structures that are typically associated with farming activities.
2. Self-Build Mortgage
Self-build mortgages are generally used when the buyer intends to build a residential property on the land. It is slightly different from regular residential mortgages in that the money is provided in stages to minimise risk.
In other words, once the current phase of construction is complete, the lender will give you the required sum to begin the next phase.
3. Commercial Mortgage
If you want to build a commercial property on the land, such as an office building, shop or a house for rent, then this mortgage type will be applicable.
Commercial mortgages are one of the most common land mortgage types that exist today.
Land Mortgage Eligibility Criteria
There are a few eligibility criteria that should be kept in mind when applying for a land mortgage.
If you meet these criteria, you will be able to get the mortgage more easily. Most of these criteria are standard for almost every mortgage plan.
1. Deposit Requirements
The first and most important aspect that you need to consider when getting a mortgage for land is the deposit.
Normally, lenders in the UK can accept as low as a 5% deposit on mortgages. However, such a practice is extremely rare in the case of land mortgages since the risks are much higher in this scenario.
So, most lenders will require you to pay the standard deposit amount of 20%. On that note, the initial deposit requirement is much more lenient for commercial land mortgages due to the risks being lower and the returns being better.
Still, we would recommend aiming for a higher deposit, as that will increase your chances of getting approved on a loan for a plot of land.
2. Loan-To-Value
The loan-to-value ratio is a financial risk assessment instrument that compares the amount of money that will be borrowed to the market value of the asset.
A low LTV is preferable for a land mortgage since it reduces the risk for the lender, thereby making it easier to get the mortgage. Ideally, we would recommend keeping the LTV to less than 80%.
However, a low LTV ratio requires a higher amount of down payments and deposits.
In that scenario, you can use the returns generated by the commercial assets to pay off the financial obligations.
3. Planning Permission
Planning permissions are required if you intend to undertake building operations or change how the land is used.
This criteria is particularly important if you intend to build a commercial property, as that will need you to modify the land.
If you obtain all the necessary planning permissions before purchasing the land, then it usually makes it easier to get the land mortgage approved by the lender and will speed up the application process.
That’s because it will give the lender a clear idea about what you plan to do with the land.
4. Affordability And Credit History
Both affordability and credit history are considered important eligibility criteria for getting a mortgage.
If your financial conditions are not very stable, your affordability will naturally be low. Likewise, unpaid debts and loans will reflect poorly on your credit history.
As a result, the lender may not approve your application for a land mortgage under such circumstances.
If you have a good credit history, then the risks for the lender will be lower, which will make it easier for them to approve your application.
It will also give you access to better interest rates, which will be financially favourable in the long run.
Mortgage for Land Application Process
The process for getting a land mortgage is a slightly different process to getting a standard mortgage but a lot of the same principles apply with regards to documents and providing proof to a lender. You’ll need to follow the steps that we have mentioned below.
Step 1: Gather The Documents
First, you will need to gather all the necessary documents regarding your finances, such as income evidence, bank statements, credit records and so on.
You will also need to gather other relevant documents like planning permissions, address and identity proofs, which are often requested by the lender. Make sure that the information in all of these documents is up to date.
Step 2: Consult A Broker Or Financial Advisor
Before you apply for a mortgage, we recommend seeking out the services of a qualified broker or financial advisor. You should get all your documents and financial records checked by these individuals, who can then provide expert advice on how to proceed with the process.
Step 3: Apply For The Mortgage
Now that the basics are done, it is time for you to apply for the mortgage. For this purpose, you should do some research on the different mortgage providers available. That way, either yourself or your chosen broker can identify the best lender for your land mortgage.
In any case, after getting in touch with the mortgage provider, you should carefully go through their criteria and guidelines.
Provide all the necessary records for verification, and once the mortgage is approved, sign all the relevant documents to finalise the mortgage.
Final Words
As you can see from the above discussion, getting a land mortgage is slightly different to a standard mortgage and comes with a few more hoops to jump through.
But, with the right guidance there are plenty of lenders who can consider this type of mortgage whether you’re buying the land to build your dream home or looking to turn a profit via a commercial property.
Your home may be repossessed if you do not keep up repayments on your mortgage.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.
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