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How to get a Land Mortgage to buy land

Land mortgages help buyers to purchase a plot of land which is usually for the purposes of building their own home (self-build) or for an agricultural business. Most of these types of transactions use a land mortgage to buy the plot of land and then will use additional funding from the mortgage to develop a property or start a business.

According to the UK Land Directory, there is approximately 60 million acres of land and 70% of this land is owned by 1% of the population. A recent shift has seen a surge in private land owners as it becomes more attractive to private investors for development. The cost of land with planning permission (building land) can be as much as 40% of the cost of a new home, which is significantly more expensive than land without planning.

In this guide, our mortgage experts explain how land mortgages work and what to look out for if you’re thinking about buying land for development. We will give you some top tips on how to get the best land mortgage deals and why this can be a good option for many buyers.

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1 Minute Mortgage – How can I get a Land Mortgage?

One of the latest trends for new homeowners and property developers is to buy land with a land mortgage, for them to develop their own property or for an agricultural business. This is a very specialist type of mortgage and it needs to be carefully thought out before you decide that this is the right route for you.

Land that is inside development boundaries will be identified in Local Authority Development Plans which is fair game for private investors and developers.

  • Land mortgages are most commonly used for private investment (re-sale), residential property development, commercial property development, or for agricultural business purposes.
  • Currently there are several mortgage lenders that offer land mortgages and these tend to be specialist lenders, as most high-street lenders tend not to offer this type of loan.
  • Most land purchases will require a minimum of a 20% deposit of the value of the land, however the bigger the deposit then the greater your chances of getting a mortgage approved.
  • Self-build mortgages can be used to purchase land or for land that you already own to fund the development of a property on a plot of land (not all lenders will fund the purchase of the land and the property development).

A land mortgage is a specialist loan that is specifically for the purchase of a plot of land. These are very different to a traditional residential mortgage because of how land ownership and buying land works.

Most mortgage lenders do not offer land mortgages and so this is a specialist product that is only available through a small group of lenders. A land mortgage also works in a similar way as any other mortgage in terms of interest rates, mortgage deals and mortgage term (years).

The main difference between a land mortgage and a normal residential mortgage is:

  • Mortgage lenders: your choice of mortgage lenders will be limited compared to residential mortgages.

  • Deposit and Loan to Value: you will usually be limited to a maximum of 80% loan-to-value which means that you will need a minimum deposit of 20%.

  • Mortgage deals and interest rates: the deals that you can get for land mortgages and the interest rates will usually be slightly higher than high-street residential mortgages.

  • Mortgage criteria: you will also usually need to have a good credit score and history to get a land mortgage (no bad credit).

Typically the funds from a land mortgage will be released to the borrower in several stages, depending on the purpose of the mortgage (e.g. self-build mortgage).

You will usually need to have all of the relevant documentation when you are buying the land and it’s advisable to have planning permission if you’re building on it. Most land transactions will be made through an agent and some land is purchased at an auction.

Mortgage interest rates for land mortgages will usually be higher and rates will also depend on your circumstances. If you’re planning on building a property on your land, it would normally be worth remortgaging your new home once it is built.

Below is a quick step by step guide for the best way to apply for a land mortgage and how to purchase land.

Step by Step guide to land mortgages:

  1. Speak to a qualified land mortgage specialist who can help you to understand what your budget is and which lenders are available.
  2. Find the land that you want to buy (ideally with planning permission already).
  3. Speak to the local authority about planning permission or to obtain your own planning permission.
  4. Agree the purchase of the land via an estate agency, land agent, or auction house.
  5. Submit an application to the appropriate mortgage lender and get a mortgage offer.
  6. Exchange contracts with the vendor and complete the sale of the land.

Note: These steps can vary slightly depending on the type of sale and the legal process for purchasing the land, as well as the planning requirements.

There are quite a few things that you can do to prepare yourself for getting a land mortgage and that will improve your chances of getting a mortgage approved.

  • Planning permission: If you’re buying land with planning permission already agreed or if not then you can start the process before you purchase the land or apply for the mortgage.

  • Architect plans: make sure that you’ve spoken to an architect or that you’ve got a good project plan for your new property.

  • Deposits and fees: land mortgages will need a bigger deposit (min. 20%) and you will need to have funds to pay for legal and other associated fees.

  • Credit score and history: these mortgage are usually difficult for people with a low credit score or bad credit so try to look at this well in advance.

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There are several main types of applications for land mortgages and different types of mortgage loans for these purchases or remortgages.

1. Self-Build Mortgages

Firstly, not all mortgage lenders that offer land mortgages will offer self-build mortgages and so this might be two separate loan applications. If the lender does allow you to combine your land mortgage with a self-build mortgage then you might be able to complete the whole project with one mortgage lender.

A self-build mortgage will be released in several stages throughout the building project and you will need to provide details of planning permission and a full project plan with architect drawings. Most lenders will also request for a surveyor or contractor to assess the project throughout the build to make sure that it meets the original brief and regulations.

The main benefit of a self-build mortgage is that you can design your own home to meet your personal requirements and often these can be cheaper than buying a property.

2. Commercial land mortgage

A commercial land mortgage is for business purposes and allows a company to buy land to develop or for other commercial uses (e.g. outdoor business, holiday homes, industrial business, etc.).

Other commercial uses can include development of buildings for various reasons such as retail, offices, and other industrial units. A common reason for commercial land mortgages is for storage facilities for personal and business use.

3. Agricultural land mortgage

An agricultural land mortgage is usually used by the farming and agricultural industry which are common in rural areas.

These types of land mortgages can be more specialist and will generally need advice from an agricultural mortgage expert. There are also several specialist mortgage lenders that only operate in this space and will offer different versions of these loans.

Agricultural land mortgages often have several different options that you can consider which can be a lump sum payment once the funds are released, or you can draw on the funds from an account as you need them. The mortgage application will need to be supported by details of the land use, a business plan, and any planning permission requirements.

4. Woodland mortgages

This tends to be a very specialist type of loan and there are only a small selection of lenders that offer woodland mortgages. These purchases tend to be few and far between due the restrictions in the UK for purchasing woodland.

You would need to provide specific details of the intended use for the woodland and legal documentation as proof.

These are classed as specialist loans and so not all lenders will offer land mortgages to new or existing customers. Most high-street banks won’t offer these types of mortgages, with the exception of some lenders like Halifax.

You should get advice from a qualified land mortgage specialist that has access to specialist lenders or even private banks. Most mortgage brokers will also charge higher fees for arranging these loans so you should also factor this in to your costs.

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You should think about and prepare for the costs of buying land which will include a number of typical fees, such as:

These costs can vary depending on your circumstances and the type of land mortgage that you are applying for.

One of the biggest benefits to self-build projects is that you can potentially save £1,000’s on Stamp Duty Land Tax (SDLT) as it will only usually be charged on the value of the land and not the property (when it is built).

Stamp Duty rules on buying land can be very complicated and they can vary dramatically depending on the intended use of the land. For proper guidance you should speak to an expert or seek advice from the local authority.

This short video from Finder UK explains more of the basic facts about Stamp Duty rules for buying property or land in the UK.

Stamp duty explained | What is stamp duty?

Note: First time buyers will usually be exempt from paying Stamp Duty Land Tax, as long as the piece of land or property they buy costs less than £425,000.

You will need a bigger deposit for a land mortgage than a traditional residential mortgage, usually a minimum of 20-25% of the value of the land. For self-build projects you might need an even bigger deposit and potentially proof of funds to be able to carry out some of the work yourself.

Some agricultural land mortgages or woodland mortgages might even require as much as 50% deposit for the loan. Loan-to-Value (LTV) limits for land mortgages can vary dramatically depending on the type of mortgage and the intended use of the land.

If you want to buy some land and you don’t want to get a land mortgage because of the rules or the costs, then there are several alternative options.

  • Remortgage your existing home: if you have another property that has enough equity and you don’t need to sell it to buy the land, then a cheaper option could be to remortgage to release equity to buy the land yourself.

  • Equity release or lifetime mortgage: if you are over 50 then you could consider a lifetime mortgage (or equity release) to purchase the land from equity in your existing home. This can then be sold or settled once your new property is ready.

  • Business loan or personal loan: you might only need a relatively small amount of money that you could access via a short-term business or personal loan, as long as it meets the lenders criteria.

  • Second charge: If you’ve already got a mortgage on your main residence and you have enough equity, then you could look at a second charge to release equity to purchase your land.

There are three main ways to buy land and each of them work in different ways, so it depends on which is the most suitable for you.

  • Auctions: there are hundreds or potentially thousands of auction houses around the UK and lots of them sell land, especially for agricultural use. These can be a cheaper way to get land but they can require a lot of patience and research to find the right plot at the right price.

You will usually need a minimum of a 10% deposit which is payable on the day and then the remaining balance would need to be paid within 4 weeks.

  • Estate agents or land agents: you can also buy land through a traditional high-street estate agent or a specialist land agent. This can be an easier way to buy land as you can search online and there will be a set price for the plot.

You should also be able to get details from the agent of any planning permission or restrictions for potential use.

  • Private seller (vendor): this tends to be an option for someone who has a friend or a relative that they know who wants to sell a plot of land. You can then usually negotiate on the sale and purchase price as well as having more flexibility around the purchase.

There are also specialist land sellers that sell land privately either for themselves or for other people, these tend to be quite specialist.

Finally, it is usually worth speaking to a qualified land mortgage expert that has dealt with these types of mortgage applications and transaction previously.

They will have a list of lenders or private banks that offer these loans and often they get lower rates than non-specialists. You will also have a greater chance of getting your mortgage approved through a land mortgage broker.

For more help and to speak to one of our team of qualified land mortgage specialists you can contact us on 0800 009 6559 or CLICK HERE for more information.

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