Built brand new and in line with a buyer’s needs, located in cleverly planned communities, and representing some of the best value in the property market, house and land packages have exploded in popularity in recent times.
But buying a house and land package isn’t the same as buying an established property, an apartment, or even a parcel of land on which you eventually plan to build. These packages represent a unique way to purchase property and therefore demand unique financing.
How does the process differ? Let’s take a closer look.
Turnkey vs plot and plan
It’s important to first note that not all house and land packages are the same. A ‘turnkey’ package – one with a prebuilt home that you can move straight into – will use the exact same mortgage as an existing home. It’s only when you purchase a ‘plot and plan’ house and land package – one with an empty plot of land on which you’ll build – that the financing arrangements change.
A two-part loan
How does a mortgage change for plot and plan purchases? Because you’ll need to pay for both a parcel of land and the construction of a home, you’ll need to take out two separate loans – one for the land, the other for the build. The land loan will follow the same rules as a normal home loan, but the construction loan will differ slightly.
The construction loan may feature a slightly higher interest rate than a regular home loan, although this increased rate will only apply during the build. As construction progresses, the lender pays the builder in installments, ‘drawn down’ from the loan. A key point is that you’ll only pay interest on the money that is ‘drawn down’, up until the point that construction is complete, at which point the loan will revert to a normal mortgage.
To simplify matters, most lenders bundle the land and construction loans together in the one package.
As with any home loan, the more of a deposit you can save, the better off you’ll be. Most lenders will allow you to borrow a maximum of 95% of the ‘on completion’ value of the house and land package, meaning you’ll need to bring a minimum of a 5% deposit to the table. Be aware that any deposit of less than 20% will incur an additional cost: lenders mortgage insurance (LMI). Saving for a larger home deposit will decrease the LMI cost.
There is one way of avoiding the need to pay a deposit altogether, however. If you have a family member who is willing to act as a guarantor, putting their own assets up as collateral against the loan, then you may be able to secure a mortgage worth 100% of the on completion value, i.e. with no deposit put down.
Choosing a quality property
Finally, perhaps the most important consideration for anyone looking to buy a house and land package is to find a quality property. In order to secure a loan, the lender’s valuation will need to closely match the purchase price. If it does, you can be confident that you’ve managed to secure a quality property at a good price.
Have you got some questions we haven’t answered here? Talk to Steve from Mortgage Compare Plus to find out more today.
Disclaimer: This article provides general information only and may not reflect the publisher’s opinion. None of the authors, the publisher or their employees are liable for any inaccuracies, errors or omissions in the publication or any change to information in the publication. This publication or any part of it may be reproduced only with the publisher’s prior permission. It was prepared without taking into account your objectives, financial situation or needs. Please consult your financial adviser, broker or accountant before acting on information in this publication.