Finance | 1 December 2020

Land Loans vs Construction Loans: How to Finance a House and Land Package

by Carlisle Homes

If you’re buying a house and land package, you’ll need to finance both the land purchase and the build.

If you already have an existing home with substantial equity, or you have enough equity in the block of land, you might be able to get a standard home loan.

For first home buyers, who don’t already have equity, a standard home loan may not be available.

This is because the bank doesn’t have the security of an existing home. If you don’t make repayments, they don’t have a building they can sell to recoup their losses.

The most common approach for first home buyers is to look for a house and land loan. This is split into two components: a land loan and a construction loan.

If you want to buy land first and then build on it later, you can also apply for the two loans as separate products.

The other alternative is a ‘turnkey package’. Here, you sign a contract for the complete cost of the house and land in one package, as quoted by the builder. This acts like a standard home loan: a 10% deposit is payable to the builder at the beginning, with the balance ready on completion. These packages are common in larger developments.

Unlike construction loans, land loans don’t come with time pressure to build straight away, which means you can take your time to save up a deposit for a construction loan or pay down the amount borrowed for your land loan.

Land loan

A land loan, as the name suggests, is a product specifically designed to finance the purchase of land.

For a standard size block of land, you can typically borrow up to 95% of the property’s value. However, you will need to take out Lenders Mortgage Insurance (LMI) if your deposit is less than 20%.

If you are buying a block that is very large, you might be required to provide a deposit of 20%. This only applies to land that is several hectares in size, though, so for most people it won’t apply.

Not all lenders offer a stand alone land loan, because they are perceived as higher risk. On the other hand, a land loan does not typically come with a time limit.

While package loans and construction loans require the building to be completed within a given time frame (usually three years or less), land loans do not. This is useful if you’re not sure when you want to build, or you want to build up equity in the land first.

A number of lenders offer construction loans that are interest-only during the construction period and then revert to a standard principal and interest loan, saving you money as your new home is being built.

Construction loan

The second component is the construction loan.

With a construction loan, you are approved for the whole loan at once, but you ‘draw down’ (use) the loan in five parts. This means that you’re only paying interest on the part/s you’ve paid out to the builder, not the whole amount.

Typically, the loan is interest-only until the build is complete, at which point it switches to principal-and-interest. This makes it more affordable while you’re waiting for your home to be ready.

The amount you can be approved for depends on:

  • The bank’s estimate of the value of the completed home; and
  • The amount your builder has quoted you to do the build.

Typically, you’ll be approved for the lower of the two amounts if they don’t match.

Our fixed price house and land packages offer a convenient and cost-effective option that helps take the stress out of building a custom home. Pictured is Brookvale at Thornhill Estate.

Pros and cons of a house and land package

Pros

  1. Because the loan is split into different components, you only pay interest on the portion of the loan you need at the time.
  2. Stamp duty is only calculated on the value of the land. If you are a first home buyer, you might also be eligible for a concession or exemption.
  3. You can customise elements of the home according to your tastes.

Cons

  1. You’ll need to pay money to the builder during the build, instead of at the end as in a turnkey package.
  2. There may be extra costs in the construction that aren’t included in your quote, and your loan may not cover those costs. Check that your builder offers an all-inclusive quote or that you understand what is and isn’t included.

Carlisle Homes offers a fixed price house and land package for all home buyers. No hidden extras, no additional costs. You’ll know exactly how much you need for your house and land package loan, with no nasty shocks at the end.

Interested to know more? Speak to one of our partners at Loan Studio for advice on the right type of loan for your dream home.

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