Vacant Land Loan Guide: How to Finance Buying Land in Australia

A vacant land loan is a home loan used to buy land you do not plan to build on straight away, so the lender funds the land purchase first and the build comes later, if at all. Because there is no house on the block yet, lenders treat a vacant land loan a little differently to a standard home loan, and the deposit, interest rate and conditions depend on your circumstances and your lender’s criteria. This guide explains how a land loan works in plain terms, what a lender looks for, the costs to plan for, and how buying land to build compares with a construction loan.

If you would rather talk it through, the team at Finance Lab can walk you through the construction home loans we work with and help you weigh up buying land now against building later.

What is a vacant land loan

A vacant land loan, sometimes called a land loan, lets you borrow to buy a block of land on its own. People use one for a few reasons: to secure a block in an area they like before prices move, to buy into a new land release, or to hold land while they save and plan a build. The land becomes the security for the loan, in the same way a house secures a normal home loan.

The main thing to know is that a vacant block produces no rent and is not somewhere you can live, so a lender cannot fall back on those things if repayments stop. That tends to make the lending more conservative, and the deposit, rate and terms you are offered will depend on the lender and your situation. Treat the figures below as a general guide rather than advice for your circumstances.

How a land loan works

A land loan works much like a standard home loan. You borrow an amount, the land secures the loan, and you make repayments of principal and interest over a term. With a principal and interest loan you make regular repayments on the amount borrowed, the principal, plus you pay interest on that amount. Some lenders allow an interest-only period, for example five years, where your repayments only cover the interest for that time and the balance does not reduce. Whether interest-only is available on a land loan depends on the lender.

Your land loan will sit on either a fixed or a variable interest rate. A fixed rate makes budgeting easier because you know what your repayments will be, while a variable rate is usually easier to switch later if you find a better deal. There is no single right answer, and the better fit depends on how much certainty you want and your circumstances.

When you compare land loans, look at the comparison rate, not just the advertised rate. A comparison rate is a single figure of the cost of the loan because it includes the interest rate and most fees, so it gives you a fairer like-for-like view across lenders. Comparison rate explained

Deposit and how much you can borrow

The deposit is where a vacant land loan often differs most from a normal home loan. As a general benchmark when buying property, a common savings goal is a deposit of 20 per cent of the purchase price, plus enough to cover buying costs. A deposit below 20 per cent generally means you need to pay lenders mortgage insurance, which protects the lender, not you, if you cannot make your repayments. Some lenders ask for a larger deposit on vacant land than on an established home because the security is just the block, so how much you need depends on the lender and the land.

How much a lender will advance also depends on your borrowing capacity, which is their assessment of what you can comfortably repay based on your income, expenses and other debts. A vacant block brings no rental income to help your case, so what you can borrow depends on your circumstances and your lender’s criteria. Borrowing power first home buyer

A calculator can give you a rough idea before you talk to anyone. Try the borrowing power calculator to see an estimate of what you may be able to borrow first.

A mortgage calculator works out the cost of principal and interest loans, calculates interest by compounding on the same frequency as the repayment you choose, and does not take into account upfront costs such as loan establishment fees, so the figure is a model, not a prediction. How the deposit translates into your loan-to-value ratio also shapes whether lenders mortgage insurance applies. What is lvr first home buyer

Buying land to build, or buying land to hold

Buying land to build and buying land to hold are two different plans, and the loan that suits each is not always the same.

If you plan to build soon, a lender may prefer a construction loan rather than a plain land loan, because a construction loan releases money in stages as the build progresses and pays the builder after each stage. If you are buying land to hold and build later, or may not build at all, a vacant land loan keeps things simple while you plan. Some buyers start with a land loan and refinance into a construction loan when they are ready to build, and whether that path works for you depends on the lender and the timing.

Lenders often look more closely at vacant land when there is no firm plan or timeframe to build, so being clear about your intentions can help your application.

Costs to plan for

Beyond the price of the land, a vacant land loan carries costs that are easy to overlook. Application fees are a one-off payment when starting a loan, also called an establishment, up-front or set-up fee, and ongoing fees are charged every month or year for administering the loan. There can also be redraw fees if you take extra repayments back out.

There are upfront costs at purchase too. Stamp duty is a state government tax that is typically payable within 30 days of settlement, and you will usually need a conveyancer or solicitor to handle the contract and settlement. It is worth building a buffer for these on top of your deposit. Features such as offset accounts and redraw facilities are ways of putting extra money into your loan to reduce the amount of interest you pay, and whether they suit you depends on how you manage your money and what your lender offers.

What to do before you commit

Buying a block is a sizeable step, so a little planning up front goes a long way. A typical path runs from saving a deposit through to settlement.

If a build is on the horizon, ask lenders early how a vacant land loan could later move to a construction loan.

Frequently asked questions

Talk it through with the team at Finance Lab

A vacant land loan is rarely one-size-fits-all, and the cheapest option on paper is not always the right one for your plans. The team at Finance Lab can compare your options across lenders and explain what each one may mean for you, whether you are buying land to build soon or holding a block for later.