Yet many people want to build their dream house on the plot and search for suitable land mortgage options to secure land at the selected location. Some may want to convert it into commercial property or agricultural land. Lenders are often reluctant to provide land mortgages.
That is why many people want to know more about land mortgages, how land mortgages work and how to get the best deals on land mortgages. And this article aims to cover all those aspects. Let’s start with the most common question we face.
Can I Get a Mortgage for Land?
In the case of regular mortgages, whether a residential mortgage or buy-to-let, you purchase a plot with an establishment built on it. And that establishment increases the value of the land and promises a regular return. But a piece of land on its own doesn’t have those features. That’s why lenders often consider it a risky investment.
What is a Land Mortgage?
A land mortgage is essentially getting a loan for some land you may want to acquire. This could be for reasons such as building a property or business purposes. Legally, a land mortgage entails the transfer of a property interest as collateral for a lending or other obligation.
Types of Land Mortgage offered in the UK.
1. Self-Build Mortgage
Once a self-build mortgage has been acquired, the lender will hand over the money in stages. For example, the first stage would be building the land and then getting the money to buy the materials needed to construct the property.
2. Agricultural Mortgages
An agricultural mortgage is possible to get for purposes of business or even for future investments. Many people may want to attain an agricultural mortgage to acquire land where they can farm and produce crops.
You can get a land mortgage to fund the purchase of agricultural land as a standalone business venture or as a long-term investment.
3. Woodland Mortgages
Often, individuals would purchase an area of woodland purely based on having it as an asset and a form of investment. This is because, in most cases, permission to make changes would not be granted.
4. Commercial Development Mortgage
This is when businesses are looking to purchase a piece of land to develop it further, such as building a supermarket or a block of residential homes.
How Does Land Mortgage Work in the UK?
Often when trying to secure a mortgage, whether for residential purposes or simply creating an investment opportunity for yourself, the lender will look for some essential things. How will their investment in you benefit the lender, and how risky is it for them to lend you a mortgage? They are essentially looking for a low-risk, high-reward solution. If the lender believes you are worthy of their investment, then you can secure the mortgage and follow your plans to build properties or for other business purposes.
Pros and Cons of Land Mortgage
Things You Need to Know to Secure a Land Mortgage
Do you pay stamp duty on a land mortgage?Stamp Duty Land Tax will have to be paid when purchasing a piece of land. Different rates apply depending on the person who buys the land and the property. Please go to our stamp duty calculator for further information.
Will you need planning permission for a mortgage on land?Having planning permission when buying a piece of land is a significant factor, especially for the lender. Because they see it as a higher risk when planning permission is not granted, therefore, it can affect your mortgage LTV and the rates that you are offered. In most circumstances, lenders will not offer more than 65% LTV if planning permission has not been obtained beforehand.
However, in many cases, when someone is trying to purchase land in the UK, planning permission has already been granted due to the fact that the current owners have not made any changes which makes it less of a problem for the current buyers.
How much deposit is required for a land mortgage?As mentioned earlier, securing a land mortgage in the UK is not as easy as getting a residential mortgage. This is simply because lenders expect to receive a far greater deposit and are not willing to invest in something they view as high risk, as many land mortgages in the UK do not have an easy-to-sell home that comes with it. They see it as a slow-moving market which poses a much greater risk to them.
In most circumstances, for land mortgages in the UK, lenders will ask for around a 30% deposit which is significantly higher than potentially securing a 5% deposit for a residential mortgage. Therefore signifies once again how hard it is to ensure a mortgage because lenders see it as a high-risk market.
Other Land mortgage criteria in the UKLenders would view your application as a strong candidate if you are able to clearly outline a business plan if you were to secure the land mortgage. Your business plan should consist of the stages of your building, the costs and materials needed etc.
If this is the case, lenders would be able to see your intentions and may see your application as a more trustworthy and lower-risk investment. Whether you are looking to build a property for yourself or for investment and commercial purposes, this is the same. This could also mean you receive lower rates and better offers from the lenders. Often lenders would reject applicants purely since an application lacked real depth.
Some significant factors when trying to secure a mortgage are your affordability and credit history. As previously outlined, lenders are always looking for a low-risk situation.
Therefore if they believe that you can not afford a land mortgage in the UK or your credit history is poor, then they will not accept your application especially when it comes to a much higher riskier mortgage such as land mortgages. Lenders will be very keen on reviewing your history, income, and outgoings to ensure you are the right person for them.
Just like any other mortgage in the UK, you will need to pay fees during the process of trying to secure a land mortgage, such as the following:
Application Fees: This is a fee paid to the broker/lender to cover the costs of your application.
Valuation Fee: This is the fee paid to the lender to send someone, often known as a qualified surveyor, to go and inspect the land to give it value.
Legal Fees: This is a fee paid to the solicitor who deals with the transfer of funds and the land. In some cases, you may also have to cover the costs of the lender’s solicitor.
How to Get a Mortgage for Land in the UK
1. Decide which type of Mortgage You Need.The first step in securing a land mortgage would be deciding what type of mortgage you want and what meets your needs the most. For example, do you need a self-build mortgage to build property for yourself or a commercial land mortgage to help grow your business? Whatever it may be, you must have a clear vision of what you intend to do. A business plan is essential to boost your application.
2. Prepare the Paperworks Needed for Land MortgageAs with every other mortgage, you will need the paperwork to apply for a land mortgage. Documentation showing income and outgoings etc. will be fundamental when it comes to providing the lender with the correct information so/ they are able to assess whether or not you are eligible to receive a mortgage. Having all the proper documents and paperwork prepared would make your application’s progress easier and will create a far smoother process when applying for your land mortgage.
3. Apply for MortgageOnce you have decided what type of land mortgage you want and prepared all the paperwork that is needed, you can start the application process. It is essential to cooperate with the lender when they want additional documents to complete your case efficiently and as quickly as possible. After this step, wait for the best offers and rates.
4. Next StepsIf the lender accepts your application and they are willing to invest in you. You are able to move forward in securing your land mortgage. There will be survey and zoning checks before everything can be finalized. Your mortgage is then going to be passed on to the solicitor to be finalized.
Tips and Tricks to Increase my chances of getting accepted for a land mortgage
Improve your credit score: Research and carry out the steps needed in order to increase your credit. Doing this will significantly boost your chances of securing a land mortgage in the UK.
Decreasing your expenses: By cutting out unnecessary expenses, you will have more money to put towards your mortgage payments which would help your application and creditworthiness. Another way is to pay off any other debts you have, which would show the lender that you have more funds at your disposal.
Increased Deposit: Putting down a more significant deposit would mean that your LTV would be far less significant which the lender would see as a less high risk situation meaning they would be more likely to invest in you and give you the mortgage you want.
Speaking to a Broker: Speaking to a specialized broker would mean that they will be able to help you with the situation and give you the best rates from the lenders, whatever the circumstance.