Land Mortgages: An Introductory Guide

Getting a land mortgage is rarely a straightforward task. This is mainly due to a lack of available options, as most major lenders offer comparatively few (if any) specialist loans for land.

Hence, shopping around for a great deal on a landlord mortgage typically means looking beyond the usual High Street banks.

The UK’s specialist lending community has a wide variety of loan options available for land purchases. Examples of this include development finance loans, bridging loans, commercial loans, and various other types of secured loans.

However as many of these lenders do not offer their services directly to borrowers, applications must be submitted via an approved broker.

Can I get a mortgage for land?

Yes, land mortgages are available from a wide variety of specialist lenders. However, qualifying for a land mortgage can be more difficult than obtaining a conventional mortgage.

With a traditional home loan, the funds are secured against the property you are purchasing. With a land mortgage, the property has not yet been built. Therefore, if the lender issues a loan that also covers the costs of building the property, they are taking a much bigger risk.

Lenders, therefore, need to see evidence of what the borrower intends to do with the land after it has been purchased. A full independent valuation of the proposed property or development must also be provided, which will be used as the basis for the maximum loan value issued.

What are the different land mortgage options available?

Specialist lenders offer a variety of different types of land mortgages, in accordance with the requirements of the applicant. Examples of these include:

• Self-build mortgages
• Agricultural mortgages
• Woodland mortgages
• Development Finance

Ensuring you apply for the right mortgage is essential in order to get the best possible deal. If in doubt, consult with an independent broker, who will ensure you understand the unique features of the land mortgage options available.

Do I need to get planning permission ahead of time?

Not necessarily, but it will certainly broaden your borrowing options. When planning permission is granted on a plot of land, its value increases significantly. It also reassures the lender that your plans for the land can go ahead.

Obtaining a mortgage for land without planning permission is still possible but can be much more difficult. If you intend to apply for planning permission in the future or have other plans for the land you are purchasing, your broker will advise on the appropriate loan options.

What are the different types of planning permission for land?

There are two main types of planning permission that can be obtained for a plot of land. Both of which could significantly boost your chances of qualifying for a competitive mortgage:

Outline planning permission (OPP)
This is an agreement in principle issued by the local council, where one or more dwellings are to be constructed on a plot of land. OPP agreements are valid for a limited period of time (typically three years) and will need to be renewed once they have expired.

In order to qualify for a land mortgage after obtaining planning permission, your lender will expect to see formal evidence of the following:

• The overall layout of the proposed dwelling(s)
• The appearance of the dwelling(s)
• Upper and lower limits for the height, width, and length of the dwelling(s)
• Site access details
• Landscaping proposals

Full planning permission (FPP)
Typically valid for a longer five-year period, full planning permission is granted upon meeting more extensive criteria. An application for FPP must satisfy all the requirements above, supplemented with detailed scale drawings of the property (or properties) and more detailed information.

FPP is always desirable in the eyes of lenders, as it adds considerable value to any plot of land. With FPP, a plot of land becomes more attractive to potential buyers, making it a safer asset to secure a loan or mortgage against.

What needs to be in my financial plan?

A detailed financial plan will need to be presented as part of your application. This is essentially a summary of all estimated construction costs, along with estimated labour costs, the logistics of how the property will be constructed, contractors who will be involved in the project, and so on.

Essentially, this is where you need to convince your lender that your project is not only viable but also economically sound. In addition, almost all lenders impose restrictions on the types of properties they will lend against and even the materials they are made of.

For example, brick-built properties are the only acceptable properties for some lenders.

Your financial plan, therefore, needs to be as detailed and comprehensive as possible. The clearer you outline your intentions and the specifics of your project, the more likely you are to qualify for funding.

How do land mortgages work?

Land mortgages work similarly to development finance loans, in that the funds are released in a series of stages. For example, the first instalment may be released to cover the costs of the land itself, followed by several subsequent instalments for key phases of the construction project.

This involves the use of surveyors hired by the lender to monitor the progress of the project. When the bank is satisfied that a key phase of the project has been completed, they will release the next instalment.

It is also possible to arrange a land mortgage that is paid in the form of a single lump sum. Bridging loans, for example, can be arranged and accessed in a matter of days, making them ideal for time-critical purchases and investment opportunities.

When the construction project is complete, the land mortgage can be repaid in the same way as a conventional mortgage. Or, in the case of a shorter-term facility, transition to a longer-term repayment loan.

There’s also the option of selling the property upon its completion in order to repay the loan in full and retain the profits.

How high are land mortgage rates?

Interest rates on land mortgages vary significantly from one product and provider to the next. As a general rule of thumb, the lowest rate you can expect to be offered is around 3%, but a more typical land mortgage rate would be around 4.5%.

With short-term funding options like bridging finance, interest is charged on a monthly basis, often as low as 0.5%. This could make a promptly repaid bridging loan a uniquely cost-effective facility, with no additional fees or penalties payable for early repayment.

How are land mortgage fees charged?

Additional borrowing costs vary on the basis of multiple factors, including the type of mortgage taken out and the issuer.

As with any mortgage, you will incur fees that you will need to consider before applying, such as:

• Application Fees: Also known as arrangement fees, processing fees, and admin fees, which can be anything from zero up to 2% of the value of the loan,
• Valuation Fees: The lender will want to see a formal valuation of the project’s estimated final value, provided by an approved surveyor and paid for by the borrower.
• Legal Fees: All legal fees and conveyancing fees must also be covered by the applicant, which may be charged as a flat fee or a percentage commission on the value of the loan.

Comparing the market with the support of an experienced broker holds the key to getting an unbeatable deal, irrespective of the type of land mortgage you apply for.

Can land be refinanced?

It is always advisable to consider refinancing options as soon as the project is complete. This is due to the fact that interest rates and borrowing costs on land mortgages have a tendency to be higher than those of conventional mortgages.

If the home (or homes) constructed on the land qualify for a standard residential mortgage, significant savings could be made. However, even bigger savings could be made by using a short-term facility (such as a bridging loan) to cover the costs of the project and repay the full outstanding balance as quickly as possible.

For more information on any of the above or to discuss land mortgages in more detail, contact a member of the team at UK Property Finance today.