Mortgage Language Lessons - Land Bank Loans

Our latest instalment of Mortgage Language Lessons - Land Bank Loans. Be aware of some of the funding limitations when purchasing property with plans already in place.

Be aware of some of the funding limitations when purchasing property with plans already in place.

What is a Land Bank loan?

A Land Bank loan is a type of investment loan, whereby the banks assumes that a property being purchased is primarily being secured for the purposes of development. This is usually assessed on the basis of an existing development application (DA) i.e. planning permits have already been granted.

It is important to note - this loan type is used to purchase developments sites as opposed to funding the actual construction, which would require a separate loan with its own terms and conditions.

What are some limitations on Land Bank loans?

Land bank loans are actually quite limiting and banks usually will only offer relatively low LVRs (Loan to Value Ratio - see our previous post on this topic for a more detailed explanation) meaning that a purchaser will have to bring more of their own cash into the mix. Banks will typically max out at 50% LVR, although in some circumstances, a broker may be able to convince the bank to stretch that out a little. Non-bank lenders who offer land bank loans will go a little higher, usually to around 65% LVR.

In practice, land bank loans are only relevant where the property's 'first and best use' (industry speak for 'most likely use') is development. In this scenario, the bank knows that the property is unlikely to produce any income in the short term - until the development has been completed. As such, they don't want to lend as much against the property as the borrower will have to use alternative/outside income (other than that associated with the property) to service the loan. This is in contrast to other property investment loans where the first and best use is a longer term investment such as leasing to a tenant.

Where a lender can be confident that the property will produce consistent income in the immediate term, they will be far more flexible both on rates and LVR.

It is important to be aware that if you are purchasing a property with existing plans, or have purchased a property and intend on applying for permits before settlement - your options for settling the land with debt will be more limited. If you are buying a property for a development and have limited cash to settle, it may be best to wait until the purchase has been settled, with a secure loan in place, before making any development applications.

Are you a developer looking to acquire land to develop in the future? Or an investor looking to get into the property market? Let us know!

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