Land Equity Construction Loan


For many, the big Australian dream is to build their own home. With it being possible to use equity from an existing property towards the land construction, here’s everything to know about a land equity construction loan.

Most homeowners will understand what property equity is. If not, it is simply the equity you gain from remortgaging your home. It is the value of the property combined with how much you have paid off, against how much is left to pay. For example, if your property is $800,000 and you still owe $500,000 to your existing home loan, then your equity is $300,000. Therefore, the $300,000 of equity can be used as your deposit and down payment for your construction loan and building your dream home.

Remortgaging a property can often change how much is left to pay for the loan. Therefore, a property owner will have more equity. Unlocking this equity can be used towards purchasing another property. Or, buying land for construction purposes and building your own home. The equity from a current property is not only eligible to use towards a property but also land to build a home. This building and finance tactic is known as a land equity construction loan.

Using your refinancing towards a construction loan is a clever technique. It is a great way to unlock a great interest rate and also unlock how much your land has appreciated over the years.

It is important not to get confused between a land loan and a construction loan.

A land loan is for a vacant block whereas a construction loan is specifically for dream home construction purposes. This involves the requirement to build a new home to live in when the land is bought.

If you wish to use your equity for a construction loan, then here is a rough idea of how much you might be eligible to borrow (depending on your position):

  • – 95% of the construction costs: with a good of perfect credit history, a regular stable income, a strong financial position, and great savings, you might be eligible to borrow up to 95% of the construction costs.
  • – 80% of the value of the land, plus construction costs: applying with the right lender could make you eligible for great construction loans, such as 80% of the land and additional fees for construction work. Most banks may disapprove of this, so it is useful to use the right lender.
  • – Up to 100% with a guarantor loan: if you can attain a guarantor loan and loan approval from the right bank, you might be eligible to borrow the entire loan amount for the construction process and land purchase.

Using this criterion, you can understand whether or not your construction loan application process will be a success. If you are unsure, then it is useful to seek professional advice with your construction loan application process to increase the chances of approval to help with the purchase price of the house and land package.

Likewise, it can help to speak to the experts about mortgage insurance and financial advice for home loans of any kind. Doing so will protect your property and finances when remortgaging and using your equity for construction loans.

Most banks will ask for the value of your current home that you wish to or have remortgaged, as well as knowledge of how long you have lived there.

Giving evidence of the purchase date will aid in securing a construction loan, as it will prove to the lender that you are capable of meeting repayments.

There are some great benefits of land construction loans, most of which involve finances.

These benefits include:

  • – More financial freedom. Attaining a land construction loan is a simple answer to more financial freedom in investments. Seeing as you can use your equity towards your deposit, you have a greater chance of being approved sooner. You will have a large chunk of money to use with your application, as well as your savings.
  • – Time-saving. If an investor lacks saving, then it is easy to use equity as a financial alternative. It saves time as it means fewer savings are required.
  • – Great profit opportunities. Land construction is ideal for short-term profits. Areas of land in popular and infrastructural areas are often appreciating in value. Therefore, using your equity to buy land and then construct on it for future sales, makes for guaranteed profit.

A construction loan does also involve risks. If you are not careful, it could end up:

  • – Costing more money. Without knowledge and experience in loaning money, especially for construction purposes, it could cost a person more money. You could end up paying off a larger loan if you borrow too much money (more than you can afford to pay off). A large deposit, which is often the case with using equity, means you are eligible to borrow more money. It is important to know if you can make the repayments before using the loan.
  • – With valuation issues. The land value does not reflect the overall cost of the project. Seeing as construction is also involved, it might cost more or less than you might think or plan for. Therefore, investing in some land to build your dream home with a guarantee in appraised value is the best bet to guarantee a good return of investment.
  • – Borrowing power. When looking for an equity loan for construction purposes, individuals borrowing power can be at risk. This is due to most banks offering a loan based upon the land valuation. If you are looking to build on your own land, which costs $100,000, and the construction project will cost $250,000, then you will need to borrow $350,000. This means you will need to borrow a lot from the bank, which many are not happy to do. The more equity and savings you can use, the better your borrowing power will be.

For those that want to build on their current land, then it is financially secure to invest all of your savings into the construction project. However, the answer is different for vacant land.

Should you want to buy land outright that is vacant for construction purposes, then you will want to make a good final decision. If you invest all of your savings and equity for the purchase of the vacant land, then you will have nothing left for the construction work. Land equity construction loans can cover some construction costs, but it might not cover all of them. Therefore, it can be a good idea to set aside some of your own savings for the construction work and land cost plus building contracts.

Furthermore, if someone purchases land and doesn’t plan to build straight away, then holding onto your own personal savings is a good idea. Personal savings are much easier to access than equity.

When you purchase land, you will need to align with the following criteria to ensure that you can access your equity at a later date:

  • – Location: choosing the right location is essential for loan approval. One that is in a major city or close to one will make equity access easier.
  • – Services: ensuring that the land has good infrastructure (access to electricity, water, and sewers) is crucial.
  • – Size: the land must be no larger than 50 hectares.
  • – Access: there must be easy access to the land, mainly through road links.

Should an individual not meet this criterion, then it might be difficult to utilise equity at a later date for a land equity loan.

In summary, anyone who is looking to build their dream home on existing land or new land will likely be looking for a land equity construction loan.

With most banks requiring a 10% deposit for a construction loan, using equity from your current property is useful. It means that you might be able to be approved for a loan, even if you do not have savings.

If your equity equates to the full amount for the deposit required, then you will be able to be successful in your application and begin the process of building a new home. A mortgage broker can assist with the remortgaging and equity process, which will be the first step in the application.

With the equity from your existing property secured, you can go about applying for a construction loan.

Although individuals will be at a higher risk of hindering their borrowing power, they will be able to secure a loan if they have higher equity. Therefore, finding the right lenders and ensuring that you are in a strong financial situation will make the dream come true.

Land and home loan for a construction project are much more easily achieved if you use your current land and its equity as collateral.

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In addition to your deposit, there will be other upfront fees and charges. Calculate your stamp duty using our simple calculator.

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