Applying for a home loan when buying land

If you’re planning on buying land in a new estate, you probably want to feel certain that you can borrow the balance when it’s time to settle. But getting unconditional loan approval may depend on whether the land is registered.

Developers can offer land for sale in two ways: as registered or unregistered land. If you’re considering buying a block in order to build, it’s important to understand the difference. These differences apply whether you’re buying a house and land package or you’re planning to choose your own builder.

Registered land has its services connected and road infrastructure complete. Its subdivision plan is registered with the relevant authorities and it’s ready to build on.

By contrast, unregistered land is not ready to build on. The infrastructure may not be complete or the subdivision plan may still be in the approval process.

Even if you received pre-approval before you paid your deposit, it’s important to remember that a lender cannot give unconditional approval until the land is registered.  Let’s look at this more closely.

Buying registered land

Before a lender can give your loan unconditional approval they need to value the land. And their valuer can only value the land once it is registered.

So if you buy registered land, the bank can conduct a valuation in order to move the loan to unconditional approval.

Because registered land has completed infrastructure and connected services, you can start building once you obtain relevant council approvals and permits.

You may need a construction loan to finance the building of the home. To approve this loan, the lender may use a Tentative on Completion (TOC) valuation based on the details in your builder’s construction contract. 

Buying unregistered land

Many new estates start off as undeveloped land. Developers are able to offer this land for sale and take deposits before it is registered for subdivision.

If you’re planning to buy land in these circumstances, you may choose to get pre-approval before paying your deposit.

But it’s very important to remember that pre-approval is not a guarantee of final approval. Instead it’s only an indication of how much the lender may be willing to lend you. Pre-approval is subject to certain conditions, such as the lender’s valuation of the property and whether it’s suitable as security for the loan.

As we mentioned earlier, the lender can only perform a valuation on registered land. And building the infrastructure and services necessary for registration may take several years as the work can involve major excavations.

Such a lengthy period between paying your deposit and settlement may present some issues that you should be aware of. Here are some things to consider.

Your pre-approval will expire

Pre-approval is based on your current circumstances and is usually valid for three months. However, as we said earlier, settlement on unregistered land can take much longer.

Once the land is registered, your lender will need to reassess your application before they give your loan unconditional approval.

In the numerous months (or even years) since you paid the deposit, the circumstances on which the lender assessed your pre-approval may have changed.  Some examples of things that could change include:

Your income

You or your partner may have moved to part-time work, lost your job or stopped work to care for children.

Your expenses

Your monthly outgoings may have gone up. You may have taken out a car loan or incurred credit card debt. If you’ve had kids, you’ll have extra mouths to feed.

Interest rates

The lender assesses your eligibility for pre-approval using today’s interest rates. A change in interest rates may impact the amount the bank is willing to lend you.

Lenders’ policies

Your pre-approval is offered according to the lender’s criteria today. Lending policy requirements are subject to change. It’s possible that policies may change in two or three years from now, which could affect the amount the bank is willing to lend you.

Property values

Property values may have changed in your area since you signed the contract. If the lender values your land lower than your purchase price, this may affect your loan-to-value ratio.

Think about your future circumstances

If you no longer meet the lending criteria at the time of settlement, your lender may not be able to approve the loan.

Alternatively the lender may ask for a bigger deposit or require you to pay Lenders Mortgage Insurance (LMI).

To help prevent a situation like this, it can be a good idea to think about your future circumstances. Are you planning kids? How stable is your job? Are you intending to borrow money for other purchases?

To sum up 

• Pre-approval is not a guarantee your loan will proceed to unconditional approval
• A lender can only value registered land
• For unregistered land, there can be a long period between paying your deposit and settlement
• Circumstances and market conditions can change over time and affect the amount the lender may lend you
• It’s a good idea think about your future circumstances.