Collateral loans using your land as collateral for your new home?
HOW CAN YOU USE LAND AS COLLATERAL ON A LOAN?
Yes, you may be able to use the equity in your land to build your dream home!
WHAT IS LAND EQUITY?
Land equity is the difference between the value of your land and how much you owe on it.
If you sold your land tomorrow the land equity would be how much you have left in your hand.
I’M WANTING TO USE MY LAND EQUITY TO BUILD A HOUSE
Yes, some lenders will approve a construction loan with land equity (or secured loan ) dependant upon how the land values up during the loan process.
Some lenders will consider lending up to 80% of your equity for a construction loan to build your home.
HOW DO CONSTRUCTION LOANS WORK?
Construction loans are notoriously difficult as there are so many factors and people involved which increases the possibility of something going wrong.
When you apply for a construction loan the lender will need a copy of the building/construction quote or tender and the proposed plans for the construction of the house.
The lender will require their valuer to estimate the costs and value of the property on the completion of construction.
If this estimate comes out as favourable the lender/bank will take these into consideration for the loan approval.
When the builder is ready to begin and needs payments for the build he/she will be required to provide approval from council and insurance to the lender who will then draw down payments to the builder.
WHAT ARE THE DOWNSIDES OF LAND EQUITY CONSTRUCTION LOANS?
Borrowing power is the main problem when it comes to getting a land equity loan.
This is because the bank uses the value of the land plus the cost of construction as the total purchase value.
So this means when purchasing land you need to do your research and ensure that the price that the seller is requesting is less than or close to the value of the land.
Other questions you need to ask are:
- Is it a good location?
- Does it have services, electrical, water, sewer?
- How big is the land? You may reduce your chances of getting a lender if the land is too big.
- Access, is there a road to the property?
If you already own the land and have been investing money into it then you will have sufficient land equity when you go to build.
However if you plan to build quite quickly you may be better off holding onto your savings as you then won’t have to apply through the bank to redraw them through your equity.
Therefore, when it comes to using land as collateral it is key to ensure you research the location and even have a valuation done before purchasing the property to ensure you are getting the best deal possible. This way you will have more success with the bank lending you the amount you need when you go to build and use the land as collateral.
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