5 ways vacant land loans differ from home loans

Buying vacant land involves a different lending process than purchasing an established property. Lenders treat vacant land as higher risk, which means stricter approval criteria, higher deposit requirements, and fewer loan products to choose from.

Lenders require a larger deposit for vacant land

Most lenders require a minimum deposit of 20% to 30% for vacant land purchases, compared to as little as 5% for established homes. Lenders Mortgage Insurance is rarely available for land-only purchases, which means you need to meet the higher deposit threshold to proceed. Some lenders will accept a 10% deposit if the land is zoned residential and you have clear plans to build within 12 months, but that scenario is not standard across the market.

Consider a buyer purchasing vacant land in South Perth with plans to build. If the land costs $500,000, they would typically need between $100,000 and $150,000 as a deposit, plus another $15,000 to $25,000 for stamp duty, legal fees, and settlement costs. That same buyer purchasing an established property at the same price could proceed with a 10% deposit and Lenders Mortgage Insurance, reducing the upfront requirement by $50,000 or more.

Interest rates are higher for land loans than owner occupied home loans

Lenders price vacant land loans higher than standard home loans because the property generates no rental income and has no dwelling to secure the loan against. Variable interest rates for land loans typically sit 0.30% to 0.80% above standard owner occupied rates, depending on the lender and your deposit size. Fixed rate options are limited, and where they exist, they carry similar rate premiums.

Some lenders will not offer land loans at all, which reduces the pool of available loan products and makes rate comparison more difficult. A handful of lenders will offer land loans at standard home loan rates if you can demonstrate building plans and a construction contract, but that requires moving forward with both the land purchase and the build at the same time.

Loan features are more restricted on land loans

Most lenders do not offer offset accounts or redraw facilities on vacant land loans. Some will allow interest-only repayments for a limited period, but this is not available across all products. If you want access to features like a linked offset or redraw, you may need to refinance once construction is complete and the property is revalued as a completed home.

In our experience, buyers who want to hold land for more than 12 months before building should factor in the lack of loan flexibility when calculating holding costs. Without an offset account, any surplus cash sitting in a savings account earns interest at a lower rate than the loan is charging, which increases the effective cost of holding the land.

Lenders assess land loans with stricter serviceability criteria

Because vacant land generates no income, lenders assess your ability to service the loan based solely on your employment income and existing debts. If you are holding other investment properties, the rental income from those properties is still shaded according to each lender's policy, but the land loan itself adds to your total debt without adding any offsetting income. This reduces your borrowing capacity for future loans and can affect your ability to secure construction finance if you plan to build later.

Some lenders will not approve a land loan unless you can demonstrate a clear plan to build within 12 to 24 months. Others will approve the loan as a standalone purchase but will reassess your serviceability when you apply for construction finance, which can create issues if your income or debt position has changed in the interim.

Loan to value ratios are capped lower for vacant land

Most lenders cap the loan to value ratio at 70% to 80% for vacant land, compared to 95% for established homes with Lenders Mortgage Insurance. This means you need a larger deposit and cannot access the same level of leverage as you would with a standard home purchase. If you plan to use equity from an existing property to fund the deposit, the lender will still assess the combined loan to value ratio across both properties, which may limit how much you can borrow.

For buyers in South Perth looking to purchase land near the foreshore or in areas like Ernest Johnson Reserve, the higher deposit requirement and lower LVR cap can delay the purchase timeline. If you are working toward a land purchase, building your deposit to at least 20% and ensuring your income can support the loan without rental offset are the two priorities that will give you access to the widest range of lenders.

If you are considering a house and land package, some lenders will approve the land component and construction loan together, which can improve your rate and loan features. If you are buying land with the intention to build, discussing the full structure with a broker before committing to the land purchase will help you avoid refinancing costs later. Call one of our team or book an appointment at a time that works for you.

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