Tim Leonard
Whether you’re buying land on which to build a new home or want agricultural land where you can farm, a land mortgage could help finance the purchase of the plot you have in mind.
How you secure a mortgage against land differs from arranging a residential mortgage to buy a property. Fewer lenders offer land mortgages too. But if you meet the eligibility criteria, and can show that buying the plot makes financial sense for you, a land mortgage can provide the funds you need.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.
How does a land mortgage work?
A land mortgage works in much the same way as any other mortgage. A lender will want to assess how much mortgage you can afford, check your credit score, know what deposit you’re putting down, and make sure the price you’re paying for the plot is in line with its valuation.
However, with a mortgage for land, you should also expect to be asked about your reasons for buying the land and how you intend to use it.
All land in the UK has a designated purpose – this might be to provide residential accommodation or industrial and commercial buildings, or it could be reserved for agricultural use, woodland or recreation. Although it’s not impossible to change the primary use of land, getting such permission can be difficult to achieve.
If you want to alter the designation of a piece of land to a different use, you’ll need to inform the lender you’re hoping to borrow through. You’ll also need to inform them of any planning applications you might have already made.
Which type of land mortgage do you need?
Land mortgages come in various forms – the type you require will depend on how the land you want to buy is categorised, and your plans for its future use. The main types of land mortgage are:
Self-build mortgage
If you’re buying a plot of land on which to build your own home, you’ll need a self-build mortgage.
This type of land mortgage can be used to cover the purchase of your plot and the cost of building your new property. To make sure you remain on budget and the funds are spent sensibly, the overall amount you secure through a self-build mortgage is released in stages or tranches, once a particular element of the build is either about to start or has been completed.
While you typically need a 25% deposit based on the build value to get started, it might be possible to find lenders requiring as little as 15%. A detailed, costed plan of your intended build will also be required.
» MORE: All about self-build mortgages
Commercial mortgage
If the land is being bought for property development – perhaps to build new residential properties or business units to be sold or rented out – a commercial mortgage may be a suitable option.
Sometimes referred to as a business mortgage, a minimum 25% deposit is usually required. Lenders will want to see a formal business plan as well.
Agricultural mortgage
As its name suggests, an agricultural mortgage can be used if you want to purchase farmland. This might include buying farm buildings, or if you want to raise funds to renovate or add to the land or buildings you already have.
Sometimes called a farm mortgage, a deposit of at least 20% or 30% is typically needed, along with a business plan to support your application.
Improving your chances of getting a mortgage for land
Whatever type of land mortgage you require, certain factors could make the difference between your application being accepted or rejected. In particular, you should remember that lenders tend to view land mortgages as being riskier than residential mortgages.
One concern is typically the longer amount of time it can take to sell land, and the problem this could pose if you fall behind on repayments and the lender can only retrieve its money by selling the land.
If a lender has doubts over the viability and likely success of your plans for the land, including getting the permissions to do what you want, your application may also prove difficult to pass.
For these reasons, you’ll usually stand a better chance of securing a land mortgage if you have:
- a higher deposit to help alleviate some of the risk lenders are taking
- a good credit score to demonstrate your reliability in meeting loan obligations in the past
- formalised and detailed budgets and plans relating to your intended use for the land
- the appropriate permission(s) in place regarding planning, particularly if you want to change the purpose for which the land is currently used. Sometimes land is sold with permission for a certain build or alternative use already in place.
As with any mortgage application, you’ll also need to ensure your wider financial situation is in as healthy a position as it can be, and that you have all the necessary supporting evidence to hand to prove your earnings, outgoings, existing loan commitments and so on.
Can I get a mortgage on land if I have bad credit?
Having bad credit won’t make securing a land mortgage easy, but it may not be impossible. With the help of a specialist mortgage broker, you might find a lender that is willing to consider your application.
How much you want to borrow, the size of your deposit, the nature of your plans, the permissions you have, and the seriousness of your credit problems are all likely to prove important.
» MORE: Tips for improving your credit score
Do you pay stamp duty on a land mortgage?
This can depend on how you intend to use the land.
If you’re undertaking a self-build project, in England and Northern Ireland stamp duty land tax (SDLT) is generally payable on the cost of the land and not the value of any property you’re about to build. In most cases, residential stamp duty rates apply, meaning stamp duty only becomes payable if the cost of the land exceeds £250,000.
SDLT is charged at a banded rate of 5% on any part of the price you pay between £250,001 and £925,000, 10% between £925,001 and £1.5 million and 12% for any portion above £1.5 million. Note that if you already own a residential property, you may have to pay an additional 3% on top of the usual stamp duty rates. However, this could be reclaimed if the new property eventually replaces your current property as your main residence, and you sell your current home within three years.
Scotland and Wales pay their own forms of tax on property transactions, which are similar to stamp duty, with nil-rate-band thresholds of £145,000 and £225,000 respectively.
In some instances the land purchased for a self-build may attract non-residential stamp duty rates, meaning tax only becomes payable if the purchase price is above £150,000.
Non-residential rates and thresholds will also usually apply if you’re buying land for agricultural or commercial purposes. Here, the rates payable are 2% on any part of the buying price between £150,001 and £250,000 and 5% on anything above £250,000.
However, working out which stamp duty regime you fall under, and therefore how much tax you need to pay, can be a complex area to navigate when buying land. Approaching a financial adviser is usually a good idea to make sure you are following the correct rules.
Wales and Scotland also have different band rates for land transaction tax for non-residential property.
» MORE: Stamp duty explained
Where can you get a mortgage for land?
Land mortgages tend to be less readily available than residential mortgages, but there should still be several options for you to consider if you know where to look.
Building societies and smaller banks can be a good place to start your search for a self-build mortgage, while a select number of high street lenders offer agricultural mortgages. Commercial mortgages tend to be more widely available, including through big-name high street banks.
However, in it could be worth approaching a mortgage broker to seek out specialist lenders, which maynot always be easily found. They might also be best placed to offer support throughout the application process.
» MORE: When should you take mortgage advice?
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