If you’re interested in building a home or another kind of building in Canada, your first step will be to buy land. Though vacant land is generally less expensive than properties with existing structures, it can still cost quite a lot of money. This is particularly true for large plots of land or land in very desirable locations.
Luckily, just like you can get a mortgage for a home, you can get financing for land as well. However, the types of loans you can get for land will be somewhat different and as with anything related to new home construction, there are many factors to consider.
In this article we will cover the different types of financing for vacant land in Canada and what may be best for you.
Different kinds of financing
When someone buys a home, the most common way to buy is with a conventional residential mortgage. But when it comes to buying land, there are many different forms of financing that are commonly used. Depending on how you want to pay for your property and how you want to use it, different financing options may be more suitable for you. Let's look at some of the common forms of financing for land purchases.
A land mortgage or a land loan is the closest option to a residential mortgage when it comes to buying land, though there are some important differences. In general, the biggest difference is that land mortgages tend to have much higher down payment requirements and higher interest rates. The reason for this difference is that a traditional mortgage is borrowed against the existing home as collateral. This allows the bank to take less risk on the loan as homes tend to have a lot of value to fall back on if the mortgage borrower defaults. On the other hand, land presents more of a risk to banks as it can be harder to sell in the event of a default. This can be even more difficult if the land is undeveloped, partly under construction, or is remote raw land with no utilities or road access. To protect themselves, the banks will expect you to pay a little more. Luckily, your land purchase is likely less than a home purchase anyway so the larger down payment may present less of a barrier than it seems.
The down payment for a land loan can be as low as 20-30% in more accessible or developed areas and up to 50% for more remote or raw land.
Construction mortgages are a financing option for those who are purchasing vacant land to build upon. A construction mortgage provides financing for not just the land itself, but also for the building being constructed. Generally, construction mortgages offer multiple rounds, or draws, of financing during the course of the home building process.
The first of these rounds is the money for the land itself. During construction, you may only need to pay interest on the money you borrow and then begin paying the loan off like a standard mortgage after the construction is completed. Like land loans, construction mortgages may have larger down payment requirements than traditional residential mortgages. Construction loans are a good option if you are building a new home because it saves you the effort of taking out a second mortgage or loan when it comes time to build.
If you are purchasing land for the purpose of farming, you may be eligible for an agricultural loan. Agricultural loans are offered by most banks thanks to a program from the Canadian government, the Canadian Agricultural Loans Act (CALA), designed to assist in new farming growth.
This program backs lenders who provide financing to agricultural property and guarantees up to 95% of any loss in the event of a default. Because they are more secure, agricultural loans can pay as little as 10% down and the money can also go towards construction or equipment costs. Agricultural loans can receive up to $500,000 to invest in land, equipment, buildings, and other uses. If you are looking to start or expand a farming operation, you should certainly look into this option.
Other kinds of financing
There are some other ways that you could choose to finance a vacant land purchase as well. Here are a few more ways that people use to secure vacant land financing:
Home equity loan
If you already own a home, you may be able to tap into that home's equity to purchase land. Maybe you already live in a city but are looking to make the move to the country. Many people use their home equity to buy a second property and you can do the same thing for buying vacant land.
With a Home Equity Line of Credit (HELOC), you can borrow money from a lender against the value of your home. These loans are popular because they are easily accessible for those with existing home equity and you can get a large sum of money very easily. In addition, they tend to have pretty favourable interest rates, which makes this an affordable way to invest inland.
Seller financing is an option that is available only if the seller chooses to offer it. With seller financing, the seller themselves acts as the lender directly. They will usually require a down payment, then you make regular payments to them as you would for a mortgage. Generally, you get to use the property while you pay it off but you do not get the legal title of the land until you have fully completed your payments.
Seller financing can be beneficial because you do not need to go through the efforts of setting up a traditional loan with a bank. If you found that the bank terms were unfavourable or you were unable to get a loan at all, this can be another option for you.
It’s also possible to go with a combination of seller financing and traditional loans, which can help you to afford properties that are more expensive than your lender is willing to cover. Because seller financing is a contract made on a per property basis, there is no set standard for the terms. This means that things like the amount of your down payment, your monthly payments, and your interest rate can all vary and will need to be negotiated with the seller.
Private lenders and personal loans
While banks and large financial institutions are the most popular choice for property financing, you may also work with private lenders or use a personal loan to buy property.
Private lenders can offer you a loan even if the larger mortgage lenders weren't willing to offer you a mortgage, for example, if you have a poor credit score. Like seller financing, private lenders are not required to follow any particular loan structure, so your terms will vary a lot between different lenders. In general, however, private lenders tend to offer shorter loan periods and higher interest in exchange for looser qualifying conditions.
Personal loans can also be used to buy vacant land. This is a good option if the land you are buying is lower priced or you just need a bit extra on top of your savings to close the purchase.
The bottom line
Getting financing for vacant land is not as straightforward as getting a residential mortgage, but this should be expected. Vacant land is a very different asset and can be used for many different purposes by many different buyers. This means that the wide range of options to finance vacant land is actually a good thing as it offers different choices for the many different buyers who may be interested in these properties.
Before you make a purchase of vacant land, you should explore your options and potentially talk to the Gaio Team to help you make the most informed decision that works best for you.