Land Loans: Definition, Types and How It Works

Raising finance to purchase land can be a headache, with many borrowers who contact us not knowing where to start. While it’s true that securing a land loan is more difficult than a standard residential mortgage, there are options out there.

Land loans are a specialist type of finance that allow you to purchase or refinance land. In this guide, we will cover the types of land loan available, including bridging loans for land, agricultural mortgages and planning gain finance. On top of this, there will be a breakdown of how land loans work, as well as the alternative ways of financing land.

What is a Land Loan?

Land loans are a type of finance that is used to purchase or refinance land. Depending on your planned use of the land once acquired, the type of land loan will vary. For example an agricultural mortgage would be most suitable if you planned on farming the land, whereas if you planned on building on it, then property development finance would be the most suitable option.

Regardless of the type of land loan you require, there are common factors amongst them all. Firstly, lenders will require a charge over the property. Secondly, your lender will require a deposit from you, usually a minimum of 30-40% of the land value.

What are the Types of Land Loans according to Land Use?

As mentioned earlier, there are several types of land loan, the main ones are:

• Bridging loans for land
• Planning gain finance
• Agricultural mortgages
• Property development finance

1. Bridging loans for land

Bridging loans for land are a type of short-term loan that is used to purchase or refinance land while waiting for another event to take place. Common reasons are to purchase land quickly while waiting for longer-term finance to be arranged, to finance land whilst waiting for it to sell or to repay an existing bridging loan.

The maximum loan to value available is usually 65%, meaning you must put down a deposit of 35%, and rates start from 0.75% per month. Bridging loans for land can be arranged in around 7-21 days, making them an important tool for those looking to raise finance against land quickly.

2. Planning gain finance

Planning gain finance works in a very similar way to bridging loans for land. It is also a short-term finance option but is specifically used to finance land while it is taken through the planning permission process.

Planning gain finance is available up to a maximum 80% loan to value (LTV), meaning you must put down a minimum deposit of 20%. When borrowing against land, the minimum rate is around 0.75%, although this can vary depending on the how likely the land is to secure planning permission.

3. Agricultural mortgages

Agricultural mortgages are a longer-term mortgage, usually available for up to 30 years and are designed for land that will be farmed. They can be used to raise finance against farms, farmland as well as the associated buildings.

Agricultural mortgages are available for a maximum of 75% LTV meaning you must put down a 25% deposit, with rates starting from 2.25% per year. When finance is required to purchase land which will be farmed over the long term, an agricultural mortgage is usually the best option.

4. Property development finance

Property development finance is used to finance the construction of a property or properties on land. Development finance is only used during the construction phase and is usually refinanced to alternative types of finance once construction is complete. The most common options here are buy to let mortgages if the property is to be let, or development exit finance if the property is to be sold.

Development finance is only available against land which will have planning permission in place by the time the loan is made. It’s usually possible to borrow up to 65% of the land value, as well as 100% of the build costs, although this may increase for experienced developers. Interest rates of 6.5-9% are common for property development loans.

How do Land Loans Work?

Land loans are secured against land by way of a legal charge and lenders are reliant on the value of the land to ensure their funds are safe. As such, each lender will require a valuation to be undertaken and this will be key to the success of your land loan application.

Land loans can be taken by almost anyone, including individuals, partnerships, LLPs, Ltd Companies, offshore borrowers and SIPPs.

Subject to meeting your lender’s LTV requirements, land loans can be taken for almost any amount, with lenders often lending millions of pounds against large, valuable sites.

What are the Pros of Land Loans?

Land loans have numerous benefits, including:

• They reduce the amount of money needed to secure land, allowing you to afford otherwise unaffordable land.
• When securing land to build property, land loans allow you to profit on your investment.
• Agricultural mortgages are a great way to get into the farming industry without having to buy a farm in cash.

What are the Cons of Land Loans?

Of course, there are always drawbacks to any loan, with land loans they are:

• Land loans cost money, meaning your profits will be reduced due to the fees and interest charged on the loan.
• Land loans require large deposits compared to loans secured against property, which could financially stretch you.

How to Get a Land Loan to Finance Land

The biggest requirement is your deposit, if you have a suitable level of deposit then you have a good chance of securing a land loan. From there, deciding which type is suitable for you is key.

Financing land is tricky compared to securing a loan against property, so it may be worthwhile talking to a broker who has experience in financing land. The lenders who offer each type of land loan vary, with only agricultural mortgages being offered by the well known high street banks. Bridging loans for land, planning gain finance and development finance is usually offered by specialist lenders or challenger banks.

From there, be prepared to provide lots of information to the lender as they will want to ensure that your plans are watertight. Detail around what you will be doing with the land, the financials and your experience will all be required alongside a detailed survey report from a RICS chartered surveyor.

How Much of a Loan can You Get for Land?

The biggest factor in deciding your maximum loan amount is the value of the land you’re looking to finance. Depending on the type of land loan you’re taking, your lender will offer no more than 65-75% of the value of the land. Subject to meeting the lender’s LTV requirements, lenders will usually offer loans from £25,000 with no maximum loan size.

What Land Loans Interest Rates Will I Pay?

The interest rate charged depends on the type of land loan required, as a guide, you can expect to pay the following:

• Bridging loan rates for land – 9-15% per annum
• Planning gain finance – 9-15% per annum
• Agricultural mortgages – 2.5-7% per annum
• Development finance – 6.5-9% per annum

What are the Other Land Purchasing Options?

If none of these options quite fit with what you’re looking for, there are a couple of alternative options available, they are:

• Secured loans – Taking a secured loan against your home can be an attractive option as if you have sufficient equity, you may be able to raise enough to purchase the land without the need for a deposit. Secured loan rates are also usually lower than those offered by land loan lenders, although it is not usually tax deductible, as would be the case when financing the land directly.
• Purchase the land ‘subject to planning’ – Purchases subject to planning involve coming to an agreement with the vendor (the person selling the land), which allows you to buy the land once planning permission has been granted. These agreements are usually time limited and remove the need for a large deposit in many cases. They do come with risk however as should you gain planning and fail to purchase the land, you will have added value to the vendor’s property without benefitting personally.