Can you get a mortgage on land?

31 January 2023

If you are looking to purchase land, you may be wondering whether you can get a mortgage on land.

The simple answer is yes, you can get a mortgage for land. However, the process is very different compared to how you would apply for a residential mortgage such as a first time buyer mortgage or even an HMO mortgage.

The primary reason the process of applying for a mortgage on land is different is because lenders view self-builds and similar developments on land as a riskier proposition compared to simply buying a house for sale.

As a result of the increased risk to lenders, there are fewer providers who offer land mortgages. You should expect to pay higher interest rates for mortgages on land compared to the rate offered by high street residential mortgage providers.

Residential Plot of Land Mortgages

If you are looking to buy a plot of land to build a property on to live in, the good news is that there are a number of lenders available who are able to offer land mortgages for this purpose. You will need to apply with a lender who offers Self-Build Mortgages.

Self Build Mortgages

The main difference between self-build mortgages and regular residential mortgages is that you will not receive a lump sum payment. Instead, you will receive the funds in stages. These stages are linked to the different stages of your build. The purpose of this is to safeguard the lender’s investment, helping to ensure that the funds are only being used for the stated purpose and to reduce the risk that you will run out of funds before finishing the build.

How the lender will distribute these funds according to the stages will differ between every lender. The two primary types of self-build mortgages are:

Arrears - An arrears self-build mortgage involves payments being made to you after each building stage has been completed. This is suitable for potential home builders who have significant funds available.

Advance - An advance self-build mortgage releases payment before each stage of the building process. This will ensure money is available to pay the labour and materials bills, as long as they are in line with forecasted predictions.

An advance self-build mortgage can help with cash flow, and make building your own home a reality for people with less funds available on hand for the initial stages. However, there are fewer lenders available who offer this type of self-build mortgage, and associated costs are higher compared to arrears self-build mortgages.

Potential benefits of a self-build mortgage

There are potential savings on stamp duty. The tax is not levied on the cost of building or the value of the property once the building work has been completed. You will however have to pay stamp duty on the value of the land, and if cost exceed £125,000
When you come to sell your property that you have built, you may find that the property valuation is higher than the cost of construction.
If your construction is well planned and executed, the cost of building your home might be less than buying an equivalent property.

Potential pitfalls associated with self-build mortgages

The deposit you require will likely be higher compared to buying a property
Similarly, the interest rate is likely to be higher compared to residential mortgage interest rates
Every construction project comes with a high-level of associated risk, especially if you are not specialists. Sticking to a forecasted budget can prove difficult even for the most experienced of builders.

Preparing for a self-build mortgage application

Applying for any type of mortgage will involve a mountain of paperwork. This is especially true when applying for a self-build mortgage. This is because the lender will want to analyse detailed plans that outline:

The requirement and current status of any relevant planning permission
The construction plans and specifications, including architectural drawings
Approval from Building Regulations
Proof of the architect’s professional indemnity cover
Proof of sufficient site insurance
Structural warranty

By having planning permission in place, you will increase your chances of approval for a self-build mortgage. Some lenders will want approved planning permission as a prerequisite to applying. You should expect to receive no more than a 75% loan-to-value mortgage, but be prepared to require an even larger deposit than 25%.

Commercial Plot Land Mortgage

If you plan to buy, or need to refinance a plot of land for commercial purposes, there are mortgage and finance opportunities available. Commercial land mortgages can be obtained from a range of commercial lenders such as banks and building societies.

Commercial land mortgages are broadly separated into two distinct categories, based on whether you intend to use the land for your own use, or whether you intend to use the land as an investment. Using the land for your own commercial use covers activities such as farming or developing property on the land. Using the land for investment purposes covers renting the land out for a separate purpose such as grazing land or a car park. If you are purchasing the land for forestry or farm land purposes, there are certain tax concessions on offer, relating to inheritance tax, capital gains tax and income tax.

Agricultural mortgage for farm land

An agricultural mortgage is designed specifically for farmers and agricultural business. It is a type of loan for businesses that want to borrow secured against the land or premises. An agricultural mortgage can be used for three main purposes:

To buy land
Release equity to support the ongoing farming or agricultural activities
Buy, extend or renovate owner-occupied premises

Eligibility requirements for agricultural mortgages

Whilst every lender will have their own unique eligibility criteria, you should anticipate requiring at least:

Three years worth of fully audited or certified accounts
Current management figures, if produced
Two months of bank statements
Assets and liabilities statement

Development Finance

Development finance is a short-term funding option designed to assist with the purchase and build costs associated with either residential or commercial developments. They are designed for between 6 to 24 months, and can be used for either building a new property, conversion or refurbishment. Similarly, development finance can be used for either the build of a single unit or multiple units built in phases.

The amount of funding that you could be eligible for with development finance depends on three key factors:

The current value of the land or the value of the property before it is either refurbished or converted
The forecasted build costs
GDV - Gross development value - the forecasted value of the completed property once all work is completed

There are multiple financing options available should you be wanting to purchase or refinance land. Many of these options will require an accurate land valuation. As members of the Land & New Homes Network, we are specialists in providing land owners with the unrivalled insight and intelligence needed to unlock the maximum value from your land.

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