Land Mortgages

There are many reasons you may wish to purchase a plot of land, from agricultural use through to property development. Many people are unsure of the finance options available for this purpose, so it pays to do some research before you begin.

In this article we’ll look at the different types of land mortgages and how to get one, as well as alternative finance options that may be more suitable, depending on what you intend to use the land for.

Can you get a mortgage to purchase land?

Yes, there are land mortgages available, largely from specialist lenders. They can be used to purchase open land, or land that has existing properties on it.

The intended purpose and location of the land will determine the type of mortgage required, the lenders available to you, and the requirement for planning permission.

Types of land mortgage

As there are a multitude of reasons that you may want to buy a plot of land, there are different types of land mortgage designed to best accommodate the needs of the project you have in mind.

• Self-build mortgages – A common reason to buy land is to build your own dream home. A self-build mortgage facilitates both the purchase of land, and the property build, with funds typically released in stages aligned with the construction. To a lesser extent, self-build mortgages that pay the funds as an upfront lump sum are also available.
• Agricultural mortgages – Far more common in rural locations, agricultural mortgages are used to finance the purchase of land that is intended to grow crops, for animal rearing, or for similar farming activities.
• Woodland mortgages – This type of mortgage is rare, but increasingly common in the UK, and enables members of the public to purchase an area of woodland. This could be for private use, to open a forest school, or as a future investment opportunity, although it can be difficult to get approval to change the purpose of woodland, and it’s incredibly rare to find woodland for sale with planning permission in place.

Of course, there are other purposes that you may wish to purchase land for, such as commercial development, however, there may be more suitable finance options for this type of investment, as discussed later in the article. An experienced broker will be best placed to advise you on the type of finance that is most suited to your plans.

How mortgages for land differ from residential mortgages

Land mortgages are similar to residential mortgages in that they are a loan that is secured on the purchased asset, however, this is a far more specialist area of lending, and as such, there are fewer lenders available.

Criteria

The standard criteria that you would expect to meet for a residential mortgage application will still apply for a land mortgage, for example:

• Affordability – The lender will need to be confident that your income supports the mortgage repayments, but how this is assessed will depend on whether the land is being used for commercial purposes or for something else.
• Creditworthiness – Whilst bad credit land mortgages exist, a strong credit rating will afford you more choice of lender, access to more competitive rates and potentially a higher LTV (Loan to Value)
• Age on application – the vast majority of mortgages, regardless of purpose, will have a maximum age cap you can have reached by the end of the term
• Deposit availability – Land mortgage deposit requirements can vary quite significantly depending on the purpose and location of the land, however, most lenders will be looking for a minimum deposit in the region of 30%.

Do you need a business plan?

This is usually a requirement. Whatever the intended purpose of your purchased land, mortgage lenders will want to see a detailed projection of your project and the associated costs.

This should include information about:

• The building type and purpose (if applicable)
• Construction plans
• Labour and materials to be used and their cost

These considerations will greatly impact whether your application will be approved, as not all lenders offer land mortgages for every purpose.

For example, some will not accept properties that are of non-traditional construction.

Are commercial land mortgages any different?

Yes, in some respects. If you’re planning to use the land for commercial property development, a commercial land mortgage lender may be more suitable.

It can be difficult to achieve higher than 50% LTV lending on this type of mortgage, however, an experienced broker with knowledge of these mortgages will be able to provide guidance in this area.

Lenders appetite for these mortgages

Land mortgages are a fairly niche area of lending, and there are significantly less lenders in this area of the market.

A few high street lenders, such as Halifax, will consider these mortgages in certain circumstances, however, the vast majority are offered by lenders that specialise in that specific area, or smaller private banks.

Many specialist land mortgage lenders are not accessible to the public, so you will need an intermediary, such as a mortgage broker, in order to access them.

This type of lender will typically assess each application on its own merits, and the deal will be tailored to the individual application, based on the risk involved with lending.

What interest rate to expect

Typical land mortgage rates at the time of writing are higher than residential mortgage rates and expect to pay between 4% and just below 6%.

But as these mortgages are bespoke, there are a number of elements that will influence that rate you are offered, however, you can generally expect to pay a higher rate of interest than for most residential mortgages.

Much like any form of finance, the lender will need to assess the risk of lending to you, and the higher the perceived risk, the higher the interest-rates are likely to be.

The following factors will be considered as part of the lenders’ risk analysis:

• The intended purpose of the land, and whether you have existing experience in that industry (if the intended use is commercial)
• The strength of your business/financial plans
• Where the plot of land is located geographically
• Whether the land has planning permission in place
• The value of your deposit and any additional asset security vs the total loan value

How to improve your appeal to lenders

It can be more difficult to secure a land mortgage, however, it’s possible to improve lender availability, as well as the potential to borrow more and/or achieve more competitive rates by preparing in advance of your application.

Here are some helpful steps that you can perform in order to do so:

• Increase your affordability and credit rating
• Offer a larger deposit or additional assets as security against the loan, this could be another property or plot of land that you own
• Ensure that the land your purchase is already approved for your intended use, or has the necessary planning permission in place for your project
• Use the services of an experienced land mortgage broker who has expert knowledge of which lenders will lend to you in your precise circumstances

Land Mortgage Calculator

Now you know what lender’s are looking for and what the typical interest rates will be, you can use our land mortgage calculator as a guide to see what the repayments could be, based on how much you’re looking to borrow.

How a broker can help

If you’re planning to get a land mortgage, speaking to a specialist mortgage broker with knowledge in this specific area of finance will greatly improve your chances of finding the right lender.

Approaching the right lender first time will save you time, money, and potential damage to your credit score from the repeated credit searches from choosing lenders that are unsuitable.

As well as finding you the right lender, mortgage brokers with expert knowledge of land mortgages can help you complete your application correctly, and anticipate common issues, such as access rights.

They can also provide advice on different types of planning permission and review your project’s financial plan before you submit it to the lender.

The brokers we work with have a wealth of experience with land mortgages, and by taking a few simple details, we can tailor our search to match you with a broker that specialises in the exact area of land purchase or refinance that you’re planning.

Do you need planning permission?

This is sometimes necessary. All UK land has a designated purpose, so when you purchase a plot of land, one of your major considerations should be what that designated purpose is and whether it matches your intentions. If not, you should consider whether planning permission is in place to allow you to change the designated land use.

The lender will also have a vested interest in the land’s designated purpose and the availability of planning permission.

If it’s necessary for your plans, lenders will usually prefer that planning permission is already in place, and it’s generally easier to secure finances in these circumstances.

This means you may need to apply for planning permission prior to obtaining a mortgage, although you should bear in mind that the ability to achieve planning permission varies, for example, it can be very difficult to change the purpose of woodland or plots of greenbelt.

Lenders will not typically offer more than 65% LTV, and give less competitive rates, if the necessary planning permission is not in place for a land mortgage.

You can check the requirements for, and apply for, planning permission with your local authority through the government portal.

Alternative finance options

Depending on how you plan to use the land, there are a number of finance options that may be more suitable than a land mortgage. They include…

Bridging loans

Bridging loans offer short term finance, and can be set up far more quickly than a traditional mortgage. As land purchases are often made at auction, bridging loans can help you to secure the finances quickly, so that you are able to meet the 28-day payment deadline on auction purchases.

They could also help you to secure land whilst you await confirmation of planning permission.

This type of loan is usually offered over 1-3 years, and approval is dependent on having a robust exit strategy in place. This could be refinancing onto a land mortgage at the end of the term, or reselling the land.

Development finance

Similar to a bridging loan, development finance is a type of short term loan which is often used for commercial developments. The funds are released in stages, in line with the development plan, with the initial sum covering the land purchase. Most lenders will offer up to 75% LTV of the purchase cost, and 100% of the construction costs.

Lender approval for development finance is largely based on the exit strategy, however they will also want the applicant to have substantial experience of property development in most cases.

How to find a land mortgage broker

It can be difficult to know which type of finance is the best option for your land purchase, and even more complicated when it comes to which lenders will consider your application. There are fewer lenders available in this niche of lending, and most are specialists, who are not accessible to the general public.

That’s why using an experienced broker as an intermediary can significantly broaden your options, and chance of successfully securing land finance.

The lenders that we work with are experts in land finance, so whether you’re looking for a land mortgage, bridging loan, or development finance, they will be able to find the ideal lender for your needs and circumstances.

We can put you in touch with a broker with the perfect match of expertise for your particular purchase type, who will be able to guide you through the entire process, minimising stress and navigating any potential pitfalls.

Call us on 0808 189 0463 or make an enquiry online, and let us match you with your ideal land mortgage broker from our network of trusted experts.