Finance a House and Land Package

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.

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.