Land loan vs home loan: what are the differences?

If you’re hoping to achieve the Great Australian Dream of owning your own home you might look for an existing dwelling in a neighbourhood meeting your needs. On the other hand, you could aspire to buy land and build your house from scratch.

While either may help you to fulfil these dreams, there are significant differences between a home loan and a land loan, also known as a vacanct land loan, to help finance these dreams in terms of qualifications and conditions imposed by lenders.

Consider discussing your financial goals and situation with a lender or mortgage broker before deciding whether to buy a house or land or choose a house and land package.

Why can land loans cost more than home loans?

Land loans are usually intended to fund the purchase of a vacant lot on which you plan to construct a house. You may buy land that has not been registered, meaning there probably isn’t a road connecting to it, or it doesn’t have a utility grid connection.

Moreover, the value of land is more prone to increasing or decreasing than the value of a house, particularly if the land size exceeds a certain threshold. For this reason, land loans represent a greater risk for lenders, which they compensate for by requiring a larger deposit and setting a higher interest rate.

When you apply for a land loan, the lender will evaluate any risk based on the land’s size and location, its accessibility to road and utility infrastructure, and its designated purpose as well as intended use. If you have prepared plans to build a home and live in it, lenders may see you as a less risky borrower and consider your loan application more favourably than if you are unclear about why you are buying the land.

Also, the loan-to-value ratio (LVR) approved by the lender for a land loan tends to be lower, and you may not get more than an 80 per cent LVR loan unless you either have a guarantor or qualify for the First Home Loan Deposit Scheme.

Is a house and land package home loan cheaper than a land loan?

If you are sure about building your home on the land you buy, finding a developer offering a house and land package may be one option to consider. The developer may have already registered the land and set up the necessary infrastructure.

From a financing perspective, you would need to apply for a land as well as a construction loan. Note that with a construction loan, a lender releases the loan amounts to you in stages, first for buying the land and later throughout the process of your build, such as laying down foundations or installing the roof et.c

The advantage of choosing a house and land package is that you might only have to pay stamp duty on the land and not on the house - if the house is yet to be built. You can use an online stamp duty calculator to find out how much you could save.

On the other hand, you may have to make sure that the land’s valuation is accurate and the developer has included all building costs, or end up paying for unaccounted expenses from your pocket. Consider checking if your lender will allow you to factor in such costs when approving your house and land package home loan.

Compare home loans in Australia