Finance to buy land
To have a patch of land to call one’s own – whether for a home, a business, or an investment in general – is a dream many people have.
But, unfortunately, it’s also one of the hardest to achieve, as buying land does come at quite a cost.
But where there’s a will, there’s a way – and the way usually taking out a loan to buy land.
Banks and other lending facilities offer what is known as land loans. They are instruments that will enable you to purchase anything between a simple parcel of land for a home or a massive amount of acreage for more ambitious endeavours.
In both principle and practice, land loans are a fixed sum that is usually repaid in monthly instalments over a previously agreed-upon term, along with interest.
But what do potential borrowers need to know before sprinting to the nearest lender?
First: Land Loans Pose Higher Risks to Lenders
Many lenders see land loans as a more significant risk than something more modest like a conventional loan or a standard mortgage on a house. As a result, interest rates can be considerably higher.
Also, land can be harder to value and sell later on if you fail to keep up with the payments and your lender has to cover the loan cost. Many lenders see land – raw undeveloped or fallow land, in particular – as a risky asset to put up as collateral.
Most would rather that you used an established or built property as security for a loan.
Second: You Have a Number of Loan Types to Choose From
Land loans come in numerous forms, but the following are the most commonly used:
● Personal or unsecured loans let you borrow a fixed sum for a set term that will run from one to seven years. Depending on the lender, you may borrow up to a maximum of £25,000.
However, note that this depends on the type of development you’re planning to do with the land. Personal loans cover small purchases, such as a parking space or a few metres of arable land. Just be sure to check if you find the going rates agreeable.
● Secured loans are borrowed against an asset of equal or approximate value like your home or another piece of land. The collateral in this type of loan reduces any risks for the lender and allows you to borrow more than £25,000. Interest rates are also more palatable for your pocket.
The payment term may be stretched out for up to 25 years. However, the downside of secured loans is that the lender can force you to sell the collateral property to recover the cost of the loan. You may consider getting a secured loan if you have a poor credit rating, but be sure that you’ll be able to keep up with the payments.
● Bridging finance is a short-term loan that can be paid within a month to three years at the most. These have higher interest rates than more traditional loan types, but you usually get your money in a very short period of time.
In addition, you need not pay monthly rates. While most lenders let you borrow anywhere above £25,000, you will only get a maximum loan-to-value (LTV) equivalent to 75 per cent of the actual land value. Lenders may go higher if you put another property up as security.
● Mortgages have a relatively short term of between two and five years. However, if the loan is used to buy land for a house, you can apply for self-build mortgages payable from 25 to 30 years.
How Landlords Can Benefit From Acquiring New Land
No matter what type of property you own or the type of tenant you have, there are always benefits you can reap from expanding your rental property.
If you choose to buy land to build new rental property, you can accommodate more tenants, which means that you’ll earn more income from the rent they are paying. The new property is a significant investment that would pay off in the long run if you get it right.
Why Loans To Buy New Land Are Perfect For Landlords
A landlord may borrow funds to buy land and use the rental income to pay back their loan. A landlord invests in this type of property, which generates rental income that is used to pay for the mortgage rates.
This type of investment can be lucrative as long as you’re able to keep up with your payments and maintain the property without any damages.
These types of loans are also ideal for people who have a business need to expand their real estate portfolio. In these instances, the landlord would use the funds to purchase more land and invest in other properties or investments.
The Bottom Line on Land Loans
Land loans come with a cost, so you have to consider it before jumping at the chance. If a landlord does choose a land loan, they need to be cautious of interest rates and repayment terms that are more favourable.
Author: Marlo Marcelino Date: 28th of October 2021
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