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Can I get a mortgage on a piece of land?

It's possible to secure finance to purchase land, but these loans work slightly differently to traditional mortgages. You may need to speak to a specialist lender.

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By

Matthew Boyle

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Mortgages on a piece of land work slightly differently to loans backed by property. In this guide, you’ll learn the key difference you’ll learn how ‘land loans’ work.

What is a ‘land loan’?

‘Land loans’ are offered by specialist lenders. Not all mortgage lenders will offer you finance on a piece of land.

The main difference between a land loan and a traditional mortgage is the lender’s opinion of the collateral. A piece of land is seen as riskier collateral for a loan than a property.

For this reason, the type of land you want to buy will play a key role in the terms offered on your loan and whether you’re approved.

How to finance a ‘land loan’

  • Personal or unsecured loans. These loans allow you to borrow a fixed sum over a set term – usually between one and seven years.
  • Secured loans. These can be used but you’ll typically need to secure the amount borrowed against an asset – in this case, the plot of land.
  • Bridging loans. These are a type of short-term finance that can be used to purchase land quickly.
  • Mortgages. Some lenders also offer land mortgages. These usually only have terms of two to five years, but if you’re getting a loan to buy land and build a house, you may be able to apply for a self-build mortgage that offers a term of 25 to 30 years.

For more details, we have written a guide on financing a land purchase in the UK.

What type of land is it easiest to secure finance for?

Lenders prefer to lend against land that it’s possible to build properties on. This is a less speculative investment in their eyes. The lender will be able to sell this land relatively quickly if it needs to.

Agricultural land is a less desirable form of collateral, especially if it has been registered as green belt land or there is no access to utilities, such as water, sewerage or electricity. Often, lenders may have to wait years to sell this at a profit.

Many lenders won’t even consider offering finance for this type of land, while others will only consider applications with a hefty deposit.

If you have secured planning permission to build on your land, this will be hugely beneficial for your application.

In this scenario, lenders can be more sure that the land will retain its value. As such, you’ll be more likely to be granted favourable rates on your land loan.

How long can you borrow money for land?

Most land loans are only offered with terms of two to five years. Often, you’ll be able to negotiate affordable monthly repayments with a balloon payment at the end of the term.

However, if you’re planning to build on the land, you should be able to convert this into a longer-term loan. You may even be eligible for a self-build mortgage, with a term of 25-plus years.

This type of mortgage is paid in stages. You’ll commonly be granted the money to buy the land, then additional funds to complete each stage of construction.

Can I borrow money against the land?

It’s possible to borrow money against land you already own. However, this isn’t easy, due to lenders’ reluctance to see land as reliable collateral. Once again, the type of land you own will play a huge role in a lender’s decision to approve a loan.

Are loans for agricultural land possible?

Although lenders are more reluctant to offer loans on agricultural land, it is possible.

There are several factors that will improve your chances of approval, including:

  • Large deposit. The less money you need to borrow from a lender, the less risky you’ll be perceived as a prospect. You can expect to be asked for a deposit of at least 30% for a land loan. If the plot of land looks particularly unattractive as collateral, this could rise as high as 50%. Many applicants withdraw equity from existing properties in order to finance land purchases.
  • High income. A lender will check your bank statement to see if you can afford the monthly repayments on your loan. If your income is high compared to your outgoings, this will improve your chances of having a loan approved.
  • High credit score. Your credit score is a numerical measurement of your reliability when it comes to repaying debt, based on previous financial behaviour. Making timely repayments on your bills will boost your credit score, while late repayments and going overdrawn will make it plummet. Applicants with a high credit score are more likely to be approved for loans. You can check your current credit score here.

These are the main three factors that will improve your chances of being approved for any loan, including ones for buying land in an urban area. If you are initially rejected for a land loan, consider working on improving your credit score or access to funds, then applying again in the future.

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