Purchasing a new property is, undoubtedly, an exhilarating experience. However, it certainly isn’t an easy task by any stretch of the imagination. Plus, people ordinarily do not have huge finances available at their disposal to make such big purchases. Therefore, a land loan comes in very handy.
However, there are several things to consider when applying for and availing of a land loan in Canada. Besides, a land loan usually requires a higher down payment and attracts higher interest rates since there isn’t a home that can act as a collateral guarantee to cover the borrowed amount.
However, things work differently when you already have land and want finances for its development. Read more if you already have a piece of land and want to know if you can get a mortgage against your land.
Keep reading to know more about a land loan, how it works, and the types of land loans you can apply for.
What is a land loan?
A land loan, otherwise known as a lot loan, is a financial tool that aids you in buying a piece of land, whether you want to build a residential building on the plot, use it for commercial purposes, farming, or buy it just for investment purposes. Besides, it’s one of the most prominent ways to purchase a plot of land in Canada.
How does a land loan work?
Like any other property loan, a land loan will require you to deposit a down payment. The lender will demand a down payment of upto 20 to 50 percent of the total purchase amount. Note that this percentage largely depends on your credit score, lender’s policy, location of the land, etc.
The difference between the total purchase cost and the down payment comes out to be the loan amount. The lender generally provides the loan for a fixed period and imposes a fixed interest rate on the loan amount.
Note that the lending term in a land loan is usually shorter than in a traditional home mortgage. Moreover, you have to pay back the loan within two to five years.
The process to apply for a land loan is somewhat similar to that of a mortgage loan. The lender will want to view your proof of income, check your credit reports and debt-to-income ratio to calculate the loan amount you are eligible to borrow.
Types of land loans
Almost every Canadian province has its peculiar land loans, but the following are the most prominent ones:
Raw Land Loan
As the name suggests, raw land is a piece of land that is not developed. It does not even have the basic amenities like water, electricity, roads, sewers, etc. Note that it can be gruelling to find finances for raw land.
You will need a good credit score in addition to a detailed plan stating how you are going to develop the raw land. Apart from this, a large down payment of more than 20 percent can significantly improve your chances of qualifying for a raw land loan.
Nonetheless, it is prudent to mention here that the cost of raw land is lower than that of developed land, but the interest rates are much higher.
Unimproved Land Loan
Unimproved and raw lands are similar to each other. However, unimproved land has some basic amenities and utilities like roads and electric poles but does not have natural gas meters, electric meters, phone boxes, etc.
The risk factor involved with unimproved land is considerably lower than that involved with raw land. However, it’s still not easier to obtain a loan for unimproved land. You will need a detailed plan, a huge down payment, and a good credit score that vouches for your financial prudence.
However, the interest rates for an unimproved land loan will not be as high as that of a raw land loan. But it’ll still be more than that of most other types of loans.
Improved Land Loan
An improved land has all the amenities and utilities like water, roads, electricity, utility meters, etc. This implies that improved land is highly suitable for constructing residential or commercial buildings. An improved land loan provides you with finances for purchasing such a piece of land.
An improved land loan’s interest rates and down payment requirements are much lower than for unimproved or raw land. Nevertheless, a good credit score smoothes your loan application approval.
What amount can be sanctioned as a land loan?
There is no thumb rule to determine the exact loan amount that you can borrow from the lender. It mainly depends on a few factors like the type of land, its location, the lender you choose, your credit score, etc.
However, the majority of lenders in Canada can finance you up to 80 percent of the land’s purchase cost.
Pros of land loans
Here’s why you should definitely consider signing up for a land loan:
- Excellent finance tool if you want to build your own home on an empty plot
- Helpful for small business owners to create new establishments
- You do not have to forfeit all your savings as you only need to deposit the down payment from your pocket and not the entire amount of the land.
Cons of land loans
Consider the following drawbacks of land loans as it’ll help you make a sound decision:
- It’s not easy to get a loan for purchasing raw or unimproved land
- The higher interest rate increases the overall expenditure incurred on purchasing the land
- You need to maintain a good credit score to better your chances of obtaining the loan
Purchasing a ready-to-move-in property or constructing one after purchasing a piece of land is a matter of personal choice. However, it’s your finances that ultimately decide which route you take.
If you want to purchase land and develop it as per your needs, a land loan will help you tremendously. Having learnt all about the different types of land loans, you now have to find a reliable lender, and you’re good to go!