Often mortgages are thought of as being for the purchase of residential property only, however, secured finance can also be obtained against land in a similar way, for a range of purposes.
The mortgage process to obtain a piece of land would be similar to that of a residential mortgage.
For example, the same checking process would take place such as; searching the applicant’s credit history, valuing the asset and undertaking the necessary legal searches.
However, mortgages for land are more specialised than for residential properties, therefore the lenders may differ, and additional criteria needs to be met.
One important criterion is the reason behind the land purchase and defining the ongoing use of the land. Once these are established, navigating the market to seek the appropriate finance will become clearer.
Different Types of Land Mortgages
Within the UK, the land is categorised by its purpose, for example for agriculture, residential or undeveloped land.
The planning laws can change depending on the objectives of the government at the time, but the laws provide the framework of rules and guide how easy or difficult it is to change the category of land and seek planning permission.
A type of mortgage needed to fund the land purchase will depend on the current category of the land, the planned usage and whether planning permission has already been sought.
The following guide explains the different options of land mortgages.
A self-build mortgage is a hybrid concept, linked to both the value of the land and the proposed value of the completed build.
However, one big difference from a traditional residential mortgage, is that the finance is provided by the lender in stages, releasing cash throughout the build phases, for example, to pay for labour and materials during the project.
Mortgages on land are also provided as part of a business venture or as owning land as an investment.
With this type of mortgage, the application would often need to be supported by a plan of how the land would be used, such as a business plan.
The document would illustrate the plan to farm the land by the applicant themselves or by leasing the land to a contract farmer for example and detail the relevant income streams.
The category of land would therefore be of interest to the lender, to ensure that it matches the applicant’s plan.
There are opportunities throughout the UK where an individual can purchase a plot of woodland. Often the change of use or land category can rarely be altered from woodland, however, areas of woodland can be purchased as investments or used for various business models such as woodland sanctuaries.
A woodland mortgage is often deemed similar to an agricultural mortgage in the application processes and with any associated restrictions.
Commercial Development Mortgage
Entrepreneurs or large businesses may seek to purchase land with plans to make developments such as to build residential or commercial units upon it.
A formalised and documented business plan and strategy will be required before a commercial development mortgage application can be submitted.
Mortgage on Land Criteria
As mentioned earlier, a land mortgage application would undertake the same checks as a traditional residential property mortgage application such as a credit check and valuation of the land however there are some differences.
The main factors that affect the ability to obtain a land mortgage and the terms offered are as follows:
- The type of land or category of use.
- The applicants plan to utilise or develop the land.
- The applicant’s credit score and credit history.
- The loan to value ratio – The required mortgage level versus the total value of the asset.
- The deposit amount.
- Any additional guarantees such as securing the loan against any other assets owned.
Land mortgages are often deemed riskier to lenders than traditional residential mortgages, therefore, to obtain a mortgage on land additional details of the transaction and future plans such as any linked income to be generated by the land are required.
Interest rates on land mortgages may be slightly higher than those offered on a property mortgage
Higher deposits are often commonplace with land mortgages. This is due to the level of risk lenders associate with this.
One reason that land is deemed higher risk to lenders is that typically the sale of land is a slower process, therefore if there were any repayment issues, it would take the lender longer to seize the asset and sell the land to recoup the funds.
Therefore, land mortgages are often only offered up to 70% of the value of the asset, requiring the applicant to cover the remaining 30%, either with a cash deposit or via securing additional funding against other assets owned with sufficient equity.
The current planning permission status on the land sought to purchase is also of high significance to lenders.
Should a developer wish to build upon land that does not have planning permission, lenders would consider this an additional risk as being granted permission can be a lengthy process and is not guaranteed. However, land is commonly sold with the relevant permissions to increase the value of the asset to the current owner.
Other Land Financing
Land is often sold through auction, which requires a deposit paid upon winning a lot. Therefore, due to the speed of such a land transaction, bridging loans are often used providing short term finance promptly whilst the sale of other assets is in progress.
Mortgages on Land Summary
Land is often deemed a scarce resource and therefore investors often seek to purchase land to retain as an investment or develop to sell on later.
There are many options available to secure a mortgage for the purchase of land as long as the additional criteria can be met including a plan for future use and any associated business plans.
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Give us a call on 01925 906 210 to speak to an advisor, or contact us for mortgage advice that’s personal to you and takes your credit history into account. That way you’ll know where you stand in the mortgage market and we can guide you on your route to securing a suitable loan.