If you’ve landed here, it’s because you’re looking to determine if you can get a mortgage for land, how to do it, and what it costs.
Below we’ll cover:
- Types of land you can get mortgages for
- The deposit needed to buy land
- Typical interest rates land mortgage lenders currently offer.
Popular Lenders Offering Mortgages for Land
Land mortgages aren’t as heavily advertised as residential or commercial mortgages, but they do still exist. Unlike the process of applying for a residential mortgage (online via automated form, or a quick call with a mortgage advisor), the process for land mortgages is a bit more time consuming.
However, there are high street lenders offering mortgages for land (labelled agricultural loans in some cases), such as Lloyds and Barclays.
Alongside checking these lenders, we’d recommend speaking to a specialist land mortgage broker. They’ll know the smaller lenders that focus specifically on offering land mortgages. Not only does this give you a better chance of getting a mortgage, but it’s likely you’ll get a better rate too.
Land Mortgages That Lenders Offer
Each land mortgage application will vary from the next, and that’s not just accounting for collateral you can offer in the form of assets or a deposit, nor your credit rating.
Different lenders focus on different types of mortgages for land, and that determines the loan to value (LTV) you might achieve, and when the cash is released.
Bear in mind that mortgages differ from land loans (such as agricultural loans). Typically, loans for land are subject to higher interest rates, and shorter terms (1-5 years, rather than 10-30 years). That’s going to increase the monthly cost substantially.
A popular reason for financing land is for a self build project. Typically, a self build mortgage will require outline planning permission as a minimum, although many lenders prefer full planning permission. Of course, full planning permission doesn’t guarantee the bank you will build a house on your land, nor that you can sell it. But it’s better than outline planning permission, which through the final stages of application could be denied, leaving the land worth a lot less than it should have been.
With mortgages for self build plots, the lender is able to assess the value of the land based on planning permission obtained to date. It can also value the land on completion of the self build project.
Typically, a land mortgage for self builds will be offered to you in a few stages. For instance, they’ll offer initial financing to fund the land and the first stage of development, and release funds in stages to allow you to complete the self-build project.
Upon completion, you’d be able to apply for a residential mortgage. Typically, this is what self build developers do. Why? Because land mortgages tend to have a higher interest rate in comparison to residential mortgages due to their increased risk.
Similar in a way to self-build land mortgages, commercial development mortgages for land are also available. These mortgages are designed for developers looking to add to the value of land, on a much larger scale than a single self-build.
This might be building a large commercial unit on bare land, converting a huge industrial property into flats, or financing the small housing development project.
Whatever the commercial development, lenders will want to see detailed plans. That’s going to include detailed financial plans (this could outline rental or sale value), to ensure that once completed, the development is worth much more than the offered as a mortgage. After all, they’re taking the risk by securing cash against an asset that doesn’t exist yet.
Agricultural, Raw & Woodland
Agricultural land, raw land and woodland have become popular investments over the past few decades, and not just for farmers.
No agricultural mortgage application is the same. For instance, some agricultural land may have great road access and have the potential for income by being farmed. On the other hand, a small woodland as part of a personal investment portfolio is hard to value. The lender might undervalue this woodland, simply to reduce their risk in the event you default on your mortgage.
Land that isn’t income producing or traded regularly in the local area is incredibly hard to value. For lenders, this increases the risk of them losing out if you default, so it’s likely you’ll need a larger than normal deposit, or be subject to a higher than normal interest rate.
Mortgage Deposit & Interest Rates
Deposit & Loan to Value (LTV)
Land mortgages don’t work as typical residential mortgages. In the past, we’ve seen 125% mortgages (essentially, mortgage lenders giving us more money than a house is worth). We’re in a more reasonable state of affairs now, with typical deposits at the low end for residential properties in the 5-10% range.
However, if you expect that kind of low deposit when buying land – with or without planning permission – you’re in for a big shock.
So, how much deposit do you need to buy land with a mortgage? At the low end for land (projects and investments that are a “sure-bet”), lenders might let you deposit as little as 20-30%. The type of collateral (if any) you provide, such as your current home, will affect the deposit needed. If you offer collateral then it reduces the risk for the lender.
However, as investments in the likes of woodlands or raw land that are unlikely to produce a ROI or income, the deposit needed might be higher; typically, in the 30-50% range.
Deposits & Buying Land at Auction
Due to the fact land isn’t as liquid as the residential property market, you’ll find a lot of good deals at auction. But, be warned, the process can be rushed, stressful, and sometimes end in tears.
Before buying at auction, it’s worth investigating further, and especially looking into the auctioneers’ terms. Many land auctioneers will require a 5-10% deposit on the day of the sale, and will need the balance within 28 days. If you can’t complete (i.e. exchange contracts and secure a mortgage) within this period, additional charges are going to apply.
Interest rates aren’t particularly low for land. They’re simply not as liquid or as easy to value as a residential property in a popular area. And, what that means for banks is that it presents more risk to them. With more risk, comes a higher interest rate.
The interest rate for land mortgages is going to fluctuate from time to time, as the Bank of England changes the base rate. Currently, if you’re offered rates of 3-4%, then you’re doing well.
Typical interest rates for land mortgages tend to be in the 4.5% range. As we’ve said, that’s a lot higher than residential property.
Getting a Low Interest Rate for Land Mortgages
To improve your chances of being able to afford the land you’ve found, there are a few things you can do.
- Offer the largest deposit possible. Reducing the LTV of a mortgage offer is going to increase your chances of getting a lower interest rate
- Produce the best possible plan for your land (if applicable). By doing so, you’ll convince bank managers that this is a solid risk:reward for them and you, which is likely to bag you a much lower interest rate.
So to sum up, you can get a mortgage on land. And, there are very few pieces of land that are “unmortgageable”. It’s more to do with your financial position and plan (credit score, collateral, deposit and business plan for the land), rather than the land itself.
And if you’re still interested in financing land with a mortgage, you can expect to achieve interest rates of around 4.5%, and will need a deposit in the 20-50% range; a 50-80% LTV.
Enjoyed our land mortgage guide? Bookmark our homepage; we regularly publish articles and guides covering land, property and investments.