Can You Use Land As Collateral On Your Loan?
If you're looking into collateral loans, you may have questions about what can be used as collateral or, more specifically, if you can use owned land as collateral on a loan. In most instances, the answer can be yes, though there are some things that should be considered.
In this guide to collateral loans, we will discuss land equity, using land as collateral, and more!
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. This land equity can be used as collateral. It is common practice to use land equity to apply for construction loans.
When it comes to smaller secured loans, Jacaranda Finance prefers a vehicle, instead of land equity, as a form of collateral.
Using land as collateral to build or fix up a house
The type of loan you're looking for will be dependent on what you intend to use it for. If you're undertaking a significant renovation or building from scratch you may consider a construction loan. If, however, you're looking to do a smaller renovation and need up to $25,000 cash, a personal secured loan may be a better option for you. You may receive a personal secured loan by instead using a vehicle as collateral through Jacaranda Finance.
If you need a loan greater than $25,000, exploring a construction loan may be the right choice for you. Some lenders will approve a construction loan with land equity (or secured loan) dependent upon how the land values up during the loan process.
Lenders may consider lending up to 80% of your land equity value for a construction loan to build your home.
How do construction loans work with land as collateral?
Construction loans can be difficult and require a degree of supporting documentation when applying. They are a viable option though for large loan amounts when building or renovating a home.
The construction loan 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 completed property if land is being used as collateral. 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. The lender 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 should ask are:
- Is it a good location?
- Does it have existing services eg. 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?
Tips on saving money when building your dream home
Loans aside, there are several other important financial decisions that go into building your home. Here’s a list of tips to consider when building your dream home that can help you save money:
- Negotiate. Try and negotiate the price of your land and offer lower yet reasonable prices. You’ll either get offered the price you’ve been negotiating or get told no, but it can be a good idea to question any initial offers.
- Find the right builder. Who your builder is will have an impact on the outcome of your dream home, along with construction costs. It’s best to always do your research before choosing a builder for your home. Apart from fitting your budget, you’ll also want to consider other factors such as whether they’ve got proper certificates and insurance.
- Deduct any unnecessary costs. Some additional features such as certain fancy windows or multi-level pitched roofs can add tens of thousands to your final cost. Even if you’re after luxurious features, do your research beforehand as you may be able to find cheaper and more sustainable alternatives that’ll help you save money.
- Build speed. Another factor that you’ll have to consider when building your dream home is how long the construction will take. Build speed can weigh heavily on your savings.
- Open communication. Once you’ve found the right builder for your project, the next step is open communication. Maintaining an open line of communication with your builder is vital to ensuring priorities are being dealt with. Make sure you’re keeping them in the loop with your goals, and never shy away from giving input. After all, it is your dream home and if you’re unhappy with certain features, they may cost you a fortune.
Using land as collateral for construction
If you already own the land and have been investing money into it, then you may have sufficient land equity when you go to build. Of course, there are other factors that come into play when securing a construction loan.
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. This is to ensure you are getting the best deal possible. Valuing the land first also means you may have more success with the bank lending you the amount you need when you go to build and use the land as collateral.
Collateral for secured personal loans
Depending on the scope of the project and its projected cost, you may also want to consider whether a secured personal loan is right for you.
If you do not need to borrow more than $25,000, rather than go through the stress of a construction loan application process, consider a smaller loan. Vehicles can be used as collateral when applying for loans of up to $25,000 through Jacaranda Finance.