Land mortgages: all you need to know

There are many reasons why you might want to buy land. Perhaps you want to build your dream home or maybe you plan to use it as part of an agriculture-based business. 

Whatever your reason, securing a mortgage to buy land is a very different process to buying a residential property. This guide explains how to apply for a land mortgage – whether that’s an agricultural mortgage or self-build mortgage – the potential costs involved, and how you can improve your chances of getting accepted.   

Can I get a mortgage for land?

The simple answer is yes, it is possible to get a mortgage to buy a plot of land. However, you won’t usually be able to pop in to see your local high-street lender, as most do not offer land mortgages. Instead, you’ll usually need to approach a specialist lender. 

Lenders generally view land mortgages as higher risk compared to a typical residential mortgage. This is because land can be harder to sell than property if the borrower is unable to keep up with their repayments (known as defaulting), and it can also be more challenging to value land compared to existing buildings. 

Agricultural land, in particular, can be difficult to secure finance against, as it may have no access to utilities such as a water supply or gas and electricity, or it may be registered as green belt land. 

As a result, there are far fewer lenders in this space, so your choice will be more limited.

How can I get a mortgage to buy land?

To get a mortgage to buy land, it can be a good idea to speak with a specialist mortgage broker who will be able to help you find the right lender for your situation. 

A good broker will be able to take your circumstances into account, including the type of land you want to buy and any potential problems you should be aware of, such as drainage issues or access rights. 

Brokers can also help ensure your application is filled out correctly. Be aware that you will usually need to include a detailed financial plan with your application, outlining what you plan to use the land for, and how much you expect building costs to be. 

What is an agricultural mortgage? 

An agricultural mortgage is simply a type of mortgage designed to help people buy farmland or farm buildings. Agricultural mortgages can also be used to fund improvements or extensions to existing farm land or properties. 

Many people look to buy agricultural land because they are planning to set up a business. Others, on the other hand, want to own a smallholding and become self-sufficient by growing their own food and keeping animals. 

Securing a mortgage on agricultural land can be more difficult, but it’s certainly possible. You’re likely to find it easier to get accepted for an agricultural mortgage if you have a large deposit – usually between 20% and 50%. Exactly how much you need will depend on the lender and the value of the land and/or properties, as well as the strength of your business plan and how much income you expect to make. 

You are also more likely to be successful if the land already has planning permission, you have an excellent credit rating and a high income.

A few high-street banks such as RBS and Barclays offer agricultural mortgages, or alternatively you can speak to a specialist lender. 

What is a self-build mortgage? 

The majority of people looking to buy land wish to do so in order to build their dream home. Because the property does not yet exist, you won’t be able to take out a standard residential mortgage. Instead, you’ll need to apply for a self-build mortgage. 

Self-build mortgages, as the name suggests, are designed to fund a property you are building yourself. Rather than receiving the funds in one lump sum, you’ll receive them in stages as different parts of the build are completed. Lenders choose to do this to reduce the amount of risk they are taking on and ensure the money is spent as planned.

Payments will usually be released when you:

  • Purchase the land

  • Lay the foundations

  • Construct the shell of the building

  • Complete plastering, plumbing and electrical wiring

  • Complete the build and have the home valued

Do I need a commercial mortgage for land? 

If you’re planning to build commercial property on a plot of land, it’s likely you’ll need a commercial mortgage. Note that with a commercial land mortgage, you’ll usually need a higher deposit of around 50%.

How long can I borrow for with a land mortgage? 

The term or length of a land mortgage will depend on the lender and the type of land you’re buying. Some land mortgages are short-term loans of 2 to 5 years, but many self-build mortgages and agricultural loans last for up to 25 to 30 years. 

What charges can I expect to pay with a land mortgage?

As with any type of mortgage, there are a number of fees and charges you’ll come across when taking out a land mortgage. These include:

  • Application fees: A fee paid to the lender and/or broker to cover the cost of your land mortgage application.

  • Valuation fees: Lenders charge a valuation fee so that the land can be valued by a qualified surveyor. A mortgage cannot be offered if the land has not been valued. Valuation fees may go up if funds are released in stages due to surveyors being instructed several times during the development. 

  • Legal fees: You will need to pay a solicitor to transfer the land over to you – known as conveyancing. You may also have to cover the cost of the lender’s solicitor who will be instructed to place a charge on the land and/or existing property and register this with the land registry.

  • Broker fee: Some brokers are fee-free as they will take a commission from the lender. Others, however, will charge you a fee on an hourly or flat-fee basis. 

What about stamp duty? 

If you are buying land for residential purposes, you may have to pay stamp duty or land tax if the land is worth £125,000 or more in England and Northern Ireland. 

Stamp duty rates are usually 2% of the portion of the purchase price between £125,001 and £250,000, 5% between £250,001 and £925,000, 10% between £925,001 and £1,500,000 and 12% for £1,500,001 and above.

Our stamp duty calculator will show you how much stamp duty you’ll need to pay when buying a residential house, flat, land, or building in the UK.

Note that between 8 July 2020 and 31 March 2021, buyers will not need to pay stamp duty on the first £500,000 of residential property or land sales. Outside this temporary holiday, first-time buyers are also usually exempt from paying stamp duty on residential property/land sales up to £300,000.

If you are buying non-residential land or property, such as commercial land or agricultural land, stamp duty works slightly differently, and it will need to be paid if the purchase price is more than £150,000. You’ll pay 2% on the portion of the purchase price between £150,001 and £250,000 and 5% on the portion above £250,000. 

Note that homeowners in Wales and Scotland pay their own Land Transaction Tax that works in a similar way. 

How can I increase my chances of getting accepted for a land mortgage?

To give yourself the best chance of being accepted for a land mortgage, there are a number of steps you can take, such as:

Reduce your expenses

When obtaining any type of mortgage, your financial situation will be carefully considered. Lenders will scrutinise your finances to see whether you can afford to take on a mortgage and will ‘stress test’ them to check you would still be able to keep up with your repayments if interest rates rose. 

Before you apply for your mortgage, it’s well worth going through your bank statements to see whether you can make any cut backs and reduce the amount you are spending each month.

Improve your credit rating

Lenders will also look at your credit score before deciding whether to let you borrow. Your credit score is a numbered rating given to you by Credit Reference Agencies (CRAs), based on the information held in your credit file. Lenders use this to determine how reliable you are as a borrower.

The higher your credit score, the more likely you are to be accepted for a mortgage (and other forms of credit) and the better your chances of being offered a competitive interest rate. 

If your credit score is low, it’s worth taking steps to improve it such as registering to vote, checking for errors on your credit report, spacing out credit applications, and paying bills on time. To find out more, read our guide on how to improve your credit score. 

Increase your deposit size

The more you can stump up for a deposit, the lower your loan to value (LTV) will be. The LTV is the size of the mortgage compared with the value of the land or property, and the lower it is, the more likely you are to be accepted for a land mortgage. 

If you only have a small deposit, your LTV will be higher, which means lenders will view you as a greater risk. As a result, lenders may be more likely to turn your application down or your borrowing costs will be higher. 

You will usually need a deposit of at least 20%, but the best rates will be offered to those who have a deposit of 40% to 50%.

Look for land with planning permission in place

If you can buy land that has already secured planning permission, lenders will view this as less risky and will be more willing to lend to you. They may also be happier offering you a mortgage with a smaller deposit and for a more competitive interest rate. 

Prepare in advance

Before applying for your mortgage, make sure you have prepared a detailed financial plan that outlines what you want to use the land for, your projected costs, how you plan to build any properties, and your expected time scales. Strong business plans are more likely to secure the most competitive interest rates. 

It’s also worth gathering together documents such as:

  • Bank statements

  • Business accounts

  • Planning permission (if applicable)

Can I get a land mortgage with bad credit? 

Yes you can but it’s likely to be harder to find a lender willing to accept your application. 

Again, it will depend on what type of land you want to buy, what you plan to use it for, the size of your deposit, whether the land has planning permission, and how serious your credit issues are as well as when they occurred. 

Before applying, it’s worth speaking to a mortgage broker who can help you find the right lender. 

10th October 2020