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How Does a Land Loan Work? Top Things to Know Before You Buy Land

How Does A Land Loan Work

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Not all people want to buy ready-made homes. Some have the time and the patience to build from scratch. If you’re one of these people, and you want to do the same, chances are you’ll be needing a land loan. A land loan is a financing option that allows borrowers to buy a patch of land so they can build a house or business. Maybe you’re wondering, how does a land loan work? Is it just like a regular loan? And the short answer is no.

A good Melbourne mortgage broker like What If We Finance will tell you that a land loan is not like a regular mortgage. Do banks give loans to buy land? Yes. But, the most significant difference between the two is that because you’re just buying land, there is no physical home that can serve as collateral in case of a default. So what does that mean for a buyer like you?

Simply put, you will have to give the lender property rights to the parcel of land you’re buying. That means that the land you will buy won’t be yours until you have paid off your loan. It also means that you are at risk of losing every structure you build on it if you don’t make timely payments to your lender. 

If you still wish to proceed with securing a land loan, we’re here to help you with the things you need to know before you buy land.

Factors to Consider When Buying Land


How much money do you have to put down to buy land? In general, land loans typically require a down payment that’s 20-30% of the total asking or contract price. Depending on the location or the proximity to prime spots in the area, the minimum down payment can go up to 50%. And maybe you’re also wondering, ‘How much loan can I get for land purchase?’ and the answer is, at best, the maximum is 70% of the plot value. There are very few lenders who can give you up to 90%, but that usually comes with high-interest rates.


So before closing a deal, make sure you have enough money to cover the upfront costs, the monthly payments and still have enough for your other financial responsibilities.


It’s essential to consider the precise location of the land you’re interested in. The safer the community and the closer it is too important establishments, the better investment it is. Make sure to assess the lot’s proximity to public transit, schools, hospitals, veterinary clinics (if you have pets), or malls for when you need to buy necessary stuff. In case you’re wondering, ‘do banks give loans to buy land that’s not in the best location?’ Then the answer is still yes. But the downside is that they may offer you a lower loan amount compared to a property that’s in a prime spot.

Natural Hazards

Some areas are vulnerable to specific natural hazards like fire or flooding. Natural hazards also include the soil condition because it will significantly affect the cost of your home’s foundation and any landscaping you’re interested in doing. The answer to the question, ‘how does a land loan work’ tells you that natural hazards will affect the loanable amount that lenders can spare for you.

Utility Resources

Lenders are interested in this because they want to help you invest in a property they know you will work hard to keep. The more ideal your living conditions are, the higher the chance that you will strive to make timely payments to keep the land. That also means that your chances of getting approved for a loan are higher if you have plans of incorporating convenient utility sources in the home you’re building.

Make sure that your property will have easy access to water, electricity, phone or cable, gas, and even waste. The more available these connections are to you, the easier you’ll find it to secure a land loan.

utility pipes

The Incline of the Property

If your property is situated on a steep incline, you are likely to spend more on building a foundation that’s level. You will also have limitations when it comes to the design of the home. If your house is at the lower part of the incline, you also have to worry about water runoff from the road. As mentioned above, one of the things that lenders look at is the potential of a property to be occupied for a long time. That gives them a guarantee that you will consistently make the necessary payments.

Once you have these areas covered, you can now proceed with applying for a land loan. You can do it personally or send in your application digitally. Nowadays, more and more lenders are accepting applications online, making the process easier and more convenient, especially for busy individuals. If you aren’t sure which step to take next, consider hiring a mortgage broker to assist you.

How does a land loan work? The truth is, the process can be tedious, especially for first-timers. That’s why we recommend getting in touch with a broker who can take the burden off you. What If We Finance is an independent mortgage broker that offers fast, convenient, and round-the-clock (available seven days a week) support. We make finance simple for you and anybody who needs help with securing a mortgage. Call us today for more details.

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