Land mortgages

Understanding the complexities of land mortgages is key for anyone considering purchasing land, whether for personal, investment, or development purposes. From understanding what a land mortgage is, how it works, and the types of land on which you can secure a mortgage to the detailed intricacies of financing options, lender selection, and potential fees involved, this guide will provide a comprehensive overview. It will also delve into specific scenarios such as handling bad credit, first-time buyer concerns, and possible outcomes in case of default.

Ultimately, our aim is to arm you with the necessary knowledge to navigate this often complex field, supporting you in making informed decisions tailored to your unique circumstances and goals.

What is a land mortgage?

A land mortgage, also often referred to as a land loan, is a form of credit that allows you to purchase a plot of land. These types of loans differ from a traditional home mortgages in several ways, primarily in terms of the use of funds and the inherent risks involved.

A traditional home mortgage is used to purchase a home that has already been built and is ready for occupancy. The home itself acts as collateral for the loan, which reduces the risk for the lender.

On the other hand, a land mortgage is used to purchase a plot of land upon which a building, such as a home or a commercial establishment, might later be constructed. Because there’s no physical structure on the land at the time of purchase, these loans can be seen as riskier by lenders. As a result, the terms of the loan, including the down payment required, interest rates, and repayment period, might be less favourable than those for a traditional mortgage.

Can I get a mortgage for land?

Yes, you can get a mortgage specifically for land, often referred to as a “land loan” or “land mortgage”. However, these types of loans are less common than traditional home mortgages and may have different requirements and terms.

Here are a few key points to consider:

Type of land: Raw land is land that doesn’t have any improvements or buildings on it. This type of land is considered a higher risk by lenders because it doesn’t have a use that will generate income. Improved land has some sort of infrastructure in place, such as utilities, roads or a physical building. This type of land is less risky for lenders.

Down payment: Land loans often require a larger down payment than traditional home mortgages. The exact amount can vary widely, but it’s not uncommon for lenders to require 20-50% of the land’s purchase price as a down payment.

Interest rates and terms: The interest rates and terms of land loans can also be less favourable than traditional mortgages. This is due to the higher risk associated with land loans. Terms also tend to be shorter than the 15-30 year terms commonly associated with traditional mortgages.

Purpose of the land: Lenders will want to know what you plan to do with the land. If you plan to build a home on the land immediately, the lender might consider this less risky than if you have no immediate plans for the land.

Lender options: Not all lenders offer land loans. You might have to shop around to find a lender that offers this type of loan. In many cases, local credit unions or community banks might be more likely to offer land loans.

How does a land mortgage work?

A land mortgage, or land loan, works in similar ways to a traditional mortgage, but there are some key differences due to the unique nature and risks of buying land.

Here’s how a land mortgage generally works:

Application: Just like a traditional mortgage, you’ll need to apply for a land loan. This will typically involve a credit check and possibly a background check. You’ll also need to provide information about your income, debts, and assets.

Down payment: Due to the increased risk of lending for land purchase, the lender typically requires a larger down payment for a land mortgage. This could range from 20% to 50% of the land’s purchase price, depending on the lender and your financial situation.

Interest rate and loan term: Land mortgages often come with higher interest rates and shorter loan terms than traditional home mortgages. This is again due to the higher risk associated with land loans. Loan terms can range widely, but you might expect terms of 10 to 15 years.

Use of funds: The funds from a land loan must be used to purchase a specific piece of property. The lender will likely require information about the location and size of the property, as well as your intended use for it.

Loan security: The land itself usually serves as the collateral for the loan. If you default on the loan, the lender has the right to seize the property to recoup their losses.

Improvement plans: If you plan to develop the land immediately (for example, by building a house), the lender may offer a construction-to-permanent loan. This is a loan that initially covers the cost of land and construction, then converts to a traditional mortgage once the construction is completed.

Repayment: As with any loan, you’ll need to make regular payments to repay both the principal of the loan and the interest. If you fail to make these payments, the lender can foreclose on the land.

It’s important to work with a lender who understands land loans and to consult with a financial advisor or an attorney to ensure you fully understand the terms and conditions of the loan before you commit.

The different types of land mortgages

Land mortgages, or land loans, can be classified into different types depending on the level of development on the land and the purpose of the loan. Here are a few common types:

Self-build mortgage: A self-build mortgage is designed for individuals who want to build their own home. The mortgage funds are typically released in stages as the build progresses rather than as a single lump sum. This reduces the risk for the lender and can help manage costs effectively for the borrower.

Woodland mortgages: These mortgages are designed for purchasing woodland or forest areas, often for conservation, recreational purposes, or as a long-term investment. There are lenders in the UK that specialise in this niche area.

Property development mortgage: This is a loan designed for individuals or businesses who want to buy land or property to develop and then sell or rent out. It’s often used for large-scale developments and can include both residential and commercial projects.

Construction loan: Similar to a self-build mortgage, construction loans are usually given in stages as the work progresses. However, these types of loans are typically used by commercial property developers rather than individuals building their own home.

Agricultural or farm loan: This is a specialised type of mortgage designed for the purchase of farmland or for the development of existing agricultural businesses. These loans often take into account the unique aspects of farming, such as periods of low cash flow and reliance on unpredictable factors like the weather.

Each of these loan types has different requirements and terms, and not all lenders offer all types. It’s important to shop around and do your research to find the loan that’s best suited for your needs and circumstances.

Land mortgage criteria

In the UK, getting a land mortgage, or a loan for land purchase, involves a slightly different process compared to getting a mortgage for a home. Lenders typically perceive land mortgages as riskier, which can influence the qualifying criteria. Here’s how you can qualify for a land mortgage in the UK:

Credit score: As with any form of credit, having a good credit score will improve your chances of getting approved for a land mortgage. Lenders will look at your credit history to see how you’ve managed past debts.

Deposit: Land mortgages typically require a larger deposit compared to traditional mortgages. Depending on the lender, you might be required to provide a down payment ranging from 20-50% of the land’s cost.

Income: Lenders will want to see proof of a steady, reliable income to ensure that you can make your loan payments. You might be asked to provide payslips, tax returns, or business accounts if you’re self-employed.

Debt-to-income ratio: This is a calculation that lenders use to gauge your ability to manage your monthly payments and repay your debts. A lower debt-to-income ratio is better when you’re applying for a loan.

Plan for the land: Lenders will likely want to know your plans for the land. If you plan to build a home on the land immediately, you might be able to get a construction loan, which can be easier to qualify for compared to a raw land loan. A detailed plan will make the lender more confident in your project.

Professional valuation: Lenders will require a professional valuation of the land to understand its market value and potential risks. The valuation can affect the terms of the loan.

Interest rates and loan term: Land mortgages often come with higher interest rates and shorter loan terms than traditional home mortgages. This is due to the higher risk associated with land loans. Be sure you’re comfortable with the interest rate and loan term before you commit.

How much deposit is required for a land mortgage?

The deposit required for a land mortgage, often referred to as a down payment, is usually larger than the deposit required for a traditional home mortgage. This is due to the increased risk that lenders associate with land mortgages.

While the exact deposit requirement can vary depending on the lender, the specifics of the land, and your personal financial circumstances, it’s not uncommon for lenders to require a deposit of between 20% to 50% of the land’s purchase price.

For example, if you were purchasing a piece of land for £100,000, you might need a deposit of between £20,000 to £50,000.

It’s also worth noting that, similar to a traditional mortgage, the size of the deposit can influence the interest rate and terms of the loan. Generally, a larger deposit will result in more favourable loan terms.

Which lenders offer land mortgages?

In the UK, several lenders offer land mortgages, though they may be less common than traditional home mortgages due to their perceived risk. It’s worth noting that the terms and conditions can vary significantly between lenders, so it’s always a good idea to shop around and compare different options.

Here are a few lenders who might offer land mortgages:

High street banks: Some high street banks may offer land mortgages, especially if you have an existing relationship with them. However, it’s worth noting that not all high street banks offer this product, and those that do may have stringent criteria.

Building societies: Some building societies, such as the Nationwide Building Society or the Leeds Building Society, might offer land mortgages or self-build mortgages, which can be used for land purchase in conjunction with a building project.

Specialist lenders: Some lenders specialise in land mortgages and self-build projects. These include the Saffron Building Society and the Ecology Building Society. They often have a more flexible approach and may lend on projects that mainstream lenders would decline.

Broker-only lenders: Some lenders work only through mortgage brokers, and they often have specialist products like land mortgages. Working with a mortgage broker could give you access to these lenders.

Private lenders / Peer-to-peer lenders: Some private lenders or peer-to-peer lending platforms may offer land mortgages. These services connect borrowers and lenders directly, often allowing for more flexible lending criteria. However, interest rates and fees can be higher.

Land mortgage rates

Land mortgage rates can vary significantly depending on various factors, such as the lender, the borrower’s creditworthiness, the size of the deposit, and the specifics of the land being purchased.

It’s important to note that land mortgage rates are typically higher than rates for traditional home mortgages. This is due to the increased risk that lenders associate with land mortgages, as the land may not have a built property on it that can be used as collateral.

Generally, you might expect to see land mortgage rates in the region of 6% to 9% or even higher, but these rates can vary significantly. Some lenders may offer lower rates for borrowers with excellent credit and a large deposit, while others may charge higher rates for riskier land purchases or borrowers with less stellar credit.

It’s crucial to shop around and compare rates from different lenders when looking for a land mortgage. A mortgage broker or financial adviser can help you find the best rates and guide you through the process.

Can I refinance land?

Yes, it’s generally possible to refinance land. Refinancing involves replacing your existing loan with a new one, usually with better terms or rates. The process for refinancing land can be similar to refinancing a traditional mortgage.

You might choose to refinance your land loan for a number of reasons:

To Obtain a Lower Interest Rate: If interest rates have fallen since you took out your original loan, or if your creditworthiness has improved, you may be able to secure a lower interest rate by refinancing.

To Change Your Loan Term: You might want to refinance to extend the loan term and lower your monthly payments, or to shorten the term and pay off the loan faster.

If you have an adjustable-rate loan and prefer the predictability of a fixed-rate loan, or vice versa, you could refinance to switch types.

If you have equity in your land, you could potentially refinance to a higher loan amount and receive the difference in cash. This is known as a cash-out refinance.

However, refinancing land can come with its own challenges. Not all lenders offer land loan refinancing, and those that do may have stricter requirements compared to refinancing a traditional mortgage. This can include a higher equity requirement, stricter credit requirements, or proof of a specific purpose for the funds in the case of a cash-out refinance.

In addition, refinancing can come with costs, such as origination fees, appraisal fees, and closing costs. You’ll need to weigh these costs against the potential benefits to determine whether refinancing makes sense for you.

Land mortgage fees

When applying for a land mortgage in the UK, you’re likely to encounter several types of fees, just as with a standard residential mortgage. Here are some of the common fees associated with a land mortgage:

Arrangement fee: This is the fee for setting up the mortgage. It can vary significantly between lenders and can sometimes be added to the mortgage amount if you don’t want to pay it upfront (though this means you’ll pay interest on it).

Booking fee: This is sometimes charged when you apply for a mortgage. It’s non-refundable, even if the mortgage doesn’t go ahead.

Valuation fee: The lender will need to carry out a valuation of the land to ascertain its value. The cost can depend on the size and location of the land.

Legal fees: You’ll need a solicitor or licensed conveyancer to carry out the legal work when buying land. They will also charge for any additional costs they incur (known as disbursements), such as Land Registry fees.

Broker fee: If you use a mortgage broker, they may charge a fee for their service.
Higher Lending Charge: If you’re borrowing a high percentage of the land’s value, the lender might charge a higher lending fee (also known as a mortgage indemnity guarantee).

Early repayment charge: If you repay your mortgage early (for example, if you refinance), you might have to pay an early repayment charge.

Exit fee: This is sometimes charged when you pay off your mortgage.

Remember, the exact fees and their amounts can vary between different lenders, and not all lenders will charge all of these fees. Always ask for a full breakdown of costs before proceeding with a land mortgage. A mortgage advisor can guide you through these fees and help you understand the total cost of the mortgage.

What types of land can I get a mortgage on?

Land mortgages can be secured on various types of land, but the specifics can depend greatly on the lender’s criteria, your intentions for the land, and the potential risks associated with the property. Here are a few general categories:

Raw land: This is land in its natural state that hasn’t been developed or improved in any way. It might be a plot in a rural area or a piece of land in a city that hasn’t been built on yet. Raw land is typically the hardest to get a mortgage on because it offers the least collateral to the lender and can be harder to sell if you default on the loan.

Improved land: This is land that has had some basic improvements, like access to utilities (water, electricity, sewerage) or roads. Lenders typically see this as less risky than raw land because it’s closer to being ready for development.

Construction/Development land: If you’re planning to build on the land immediately, you might be able to get a construction loan or a self-build mortgage. This would typically be released in stages as the build progresses.

Agricultural land: This is land intended for farming or other agricultural activities. Some lenders specialise in loans for agricultural land, and there are also government schemes that might be able to assist.

Woodland/Forestry: This refers to land that is predominantly covered by trees and used for forestry activities. Securing a mortgage for woodland can be more challenging, but there are lenders who specialise in this area.

Brownfield land: This is previously developed land that is not currently in use and might be suitable for redevelopment. The difficulty of securing a mortgage on brownfield land can depend on the specifics, like the previous use and the potential for contamination.

Each type of land carries its own set of challenges and potential risks, and as such, lenders will have their own criteria for lending on them. This may include higher deposit requirements or higher interest rates compared to a traditional residential mortgage. It’s advisable to consult with a mortgage broker or financial adviser who has experience with land purchases to guide you through the process.

Will I need planning permission for a mortgage on land?

Whether or not you need planning permission to secure a mortgage on a piece of land can depend on the lender’s requirements, as well as your intentions for the land.

If you’re purchasing the land with the intention of building on it, lenders will often require you to have planning permission in place before they’ll agree to a mortgage. This is because having planning permission generally increases the land’s value and reduces the risk to the lender. If you default on the mortgage, the lender can sell the land more easily and possibly at a higher price if planning permission is already in place.

However, if you’re purchasing the land for other purposes (for example, as an investment or for agricultural use), you may not need planning permission to get a mortgage. The requirements can vary depending on the lender, the specifics of the land, and your plans for it.

Even if planning permission is not required for the mortgage, it’s essential to be aware that planning permission will be necessary before you can build on the land. It’s generally advisable to consult with a solicitor or local planning authority to understand what permissions may be needed.

Remember that the specifics can depend greatly on the individual circumstances, so it’s always a good idea to speak with a mortgage broker or financial adviser to understand the requirements of your situation.

Outline planning permission (OPP)

Outline Planning Permission (OPP) is a term used to refer to a grant of planning permission in principle, subject to further detailed plans.

This type of planning permission allows the local planning authority (LPA) to consider the general principles of how a site can be developed. OPP is typically sought to establish whether the scale and nature of a proposed development would be acceptable to the local planning authority before any substantial costs are incurred working up detailed designs.

Applications for OPP can only be made for developments that involve building work (not for a change of use, for instance) and need to include information on:

Use: The use or uses proposed for the development and any distinct development zones within the site.

Amount of development: The amount of development proposed for each use.

Indicative layout: An indicative layout of the proposal with the approximate location of buildings, routes and open spaces.

Scale parameters: An indication of the upper and lower limits for height, width and length of each building within the development.

Landscaping: An indicative proposal for landscaping the site. Once OPP is granted, you need to get approval of the details of the scheme before work can start. This is known as ‘approval of reserved matters’, and it must be done within three years of the OPP being granted. The reserved matters are typically the access, appearance, landscaping, layout, and scale of the development.

Full Planning Permission (FPP)

Full Planning Permission (FPP) refers to the approval granted by a local planning authority (LPA) for a detailed proposal for development. Unlike Outline Planning Permission (OPP), which establishes the general principles of development, FPP requires comprehensive plans and details about the proposed development.

Applications for FPP must include several elements:

Detailed drawings: These show the exact dimensions of the proposed buildings and the layout of the entire site, including access points, landscaping, and parking.

Design and access statement: This document explains the design principles and concepts that have informed the development and how issues relating to access to the development have been dealt with.

Supporting information: Depending on the complexity and size of the development and the specifics of the site, other documents may be required. These could include an environmental impact assessment, a flood risk assessment, or a transport assessment, among others.

Once granted, FPP typically lasts for three years, meaning that work must begin within this time period. Extensions can sometimes be granted, but these are not guaranteed and should not be assumed.

It’s important to remember that even if you have FPP, you may still need other permissions (for instance, building regulations approval, listed building consent, or a license for works affecting protected species) before work can commence.

Navigating the planning permission process can be complex, so it’s advisable to seek professional advice or consult with your local planning authority to understand the requirements.

Will I need a financial plan?

When applying for a land mortgage, having a comprehensive financial plan can be extremely beneficial and often necessary, particularly if you intend to develop the land. This plan helps lenders understand your ability to repay the loan and the viability of your proposed project. It could cover:

Budget for Land Purchase and Development: Detail the costs for purchasing the land and any anticipated costs for developing it. This might include building costs, architect’s fees, legal costs, planning and permit fees, utility connections, and contingencies for unforeseen expenses.

Income and expenses: This should be an overview of your current and future income and expenditures, including the expected cost of the land mortgage and other financial commitments. This demonstrates your capacity to meet repayments.

Profit projection: If you’re developing the land for commercial purposes or plan to sell it after development, it’s good to include a profit projection. This shows the anticipated value of the developed land or properties, potential sale prices, or rental income.

Exit strategy: Lenders will want to see that you’ve considered how you’ll repay the loan at the end of the term. This might involve selling the developed property, refinancing to a traditional mortgage, or another plan.

Contingency planning: What if things don’t go as planned? A contingency plan showcases that you’ve considered potential setbacks, such as delays in construction or changes in property values, and how you’d handle them.

Your financial plan should be detailed, realistic, and well-researched. It may be beneficial to seek the help of a financial advisor or accountant when creating it. Also, be prepared to provide supporting documents such as bank statements, proof of income, and potentially business plans or personal financial statements. Remember that each lender’s requirements can vary, so it’s important to confirm what’s needed in your particular situation.

Buying land and other financing

If you’re considering buying land, there are various financing options available beyond traditional land mortgages. Here are a few you might consider:

Cash purchase: If you have enough savings, the simplest way to buy land is outright with cash. This eliminates the need to pay interest on a loan and can often make the purchasing process quicker and simpler.

Seller financing: Sometimes, the owner of the land may be willing to finance the purchase themselves. This means you pay them in instalments, typically with interest, until the full purchase price is paid off. Terms for seller financing can vary widely and should be clearly laid out in a legal agreement.

Personal loans: Depending on the cost of the land and your personal credit situation, a personal loan might be an option. Personal loans can be unsecured (meaning they don’t require collateral), but they often come with higher interest rates than secured loans like mortgages.

Home equity loans or lines of credit (HELOC): If you own a property and have sufficient equity in it, you might consider a home equity loan or line of credit. These types of loans use the equity in your home as collateral.

Bridging loans: These are short-term loans designed to ‘bridge’ a temporary cash shortfall. They could be useful if you need to buy land quickly but don’t have your financing fully arranged yet. They typically have high-interest rates and are meant to be paid back quickly, often when long-term financing (like a mortgage) is secured.

Agricultural or business loans: If the land is to be used for farming or another business purpose, you might qualify for specialised agricultural or business loans. In the UK, some government-backed schemes can assist with agricultural or rural land purchases.

Joint Ventures or partnerships: If the cost of the land is high, you might consider partnering with another person or entity to share the costs.

When considering financing options, it’s important to assess the pros and cons of each and think about your long-term plans for the land. It can be useful to consult with a financial adviser or mortgage broker to understand which options might be best for your situation.

Land finance specialists

Land finance specialists are professionals who specialise in providing advice and financial services related to purchasing and developing land. This can include lenders who specialise in land and development loans, as well as brokers and advisers who can guide you through the process of securing finance.

Here are some types of specialists you might consider:

Land mortgage lenders: These are banks or other financial institutions that offer mortgages specifically for land purchases. Some may specialise even further, focusing on certain types of land or certain uses, like agriculture or development.

Land brokers: These professionals specialise in buying and selling land. They can help you find suitable properties and can often offer advice on financing options.

Mortgage brokers: A mortgage broker can help you find the best mortgage options for your needs and circumstances. Some brokers may specialise in land and development finance.

Financial advisers: A financial adviser can provide personalised advice on financing a land purchase and can help you create a financial plan.

Development finance specialists: These professionals specialise in financing for property development, including land purchases and construction costs. They can help you secure the right type of financing for your project.

Commercial property finance specialists: If you’re purchasing land for commercial use, a specialist in commercial property finance can help you navigate the specific challenges and opportunities in this area.

When choosing a specialist, it’s important to consider their experience and expertise, as well as their understanding of your specific needs and circumstances. Always do your research, check reviews or testimonials, and don’t be afraid to ask questions to ensure they’re the right fit for your project.