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What you need to know about home loans for house and land packages
Found the perfect house and land package for your dream home? Here’s how to get the financing you need to turn the dream into reality.
If you’ve found a block of land that looks like the perfect site for your new home, you’ll probably need to borrow money from the bank to transform that vacant piece of land into your dream residence. But choosing a house and land package usually means that a regular home loan won’t be an option, so you’ll need to find a loan that can be tailored to suit your needs.
What is a house and land package?
Much of the new home construction that takes place in Australia nowadays is done by property developers. When land is released by the government, developers acquire that land and build the necessary infrastructure to turn it into a residential area. They then either build homes and sell them to homebuyers, or they allow buyers to choose from a number of standard home designs which can be customised to suit individual tastes.
This second option allows you to acquire a block of land and build the home you want, but you won’t be able to fund the purchase of this type of house and land package with an ordinary home loan.
Home loans for house and land packages
Financing for house and land packages can be split into two discrete areas: buying the block of land and then building the home. While it’s possible to take out a separate loan with different lenders for each part of the process, the most common approach is to bundle the land purchase and the home construction together with the one lender.
In most cases, the land can be purchased with a straightforward mortgage loan, which most Australians are familiar with. Once settlement occurs on the land, you then take out a construction loan to finance the build of the house.
A construction loan lets you “draw down” an agreed amount of money at each stage of the construction process. This allows you to pay your builder and also ensures that you only pay interest on the money you use at each stage of the process.
How do home loans for house and land packages work?
House and land package home loans involve two parts: a regular mortgage and a construction loan.
The regular mortgage applies to the vacant block of land and works just like any other normal home loan – you borrow a lump sum, are charged a fixed or variable interest rate and make regular repayments to pay down the principal and the interest.
Once the land purchase has been settled and a mortgage has been registered on the title, the second part of buying a house and land package involves taking out a construction loan to finance the new home build.
Construction loans are set up a little differently to typical home loans. Rather than borrowing a lump sum, construction loans allow you to draw down money in staggered instalments at set stages of the construction process – for example foundations, frame and brickwork, lockup and completion. These draw down amounts are fixed when you apply for a loan, so you will need to supply fully-costed construction plans to the lender before your loan will be approved.
Along the way, you will only pay interest on the amount you draw down from the loan. But once construction is complete and the builder has been paid, the full mortgage will be in force and you will have to pay interest on the entire amount.
Finally, it’s also worth pointing out that construction loans usually require you to build within a specified time frame, such as one or two years. You can find out more about these mortgages in our construction loan guide.
Finding the right loan
The good news is that it’s not really any harder to obtain financing for a house and land package than it is to take out an ordinary home loan. These types of loans are offered by banks and non-bank lenders across Australia, with most people choosing to bundle an ordinary mortgage and a construction loan together with the same lender.
So if you want to buy a house and land package and create your dream home, compare the interest rates, fees and features on offer from a wide range of lenders. This will help you find the most affordable home loan for your house and land package.
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Ask an Expert
Hi, we own an old house right out no finance on it and it needs to be knocked down and re build. However we don’t have a deposit but we have equity with our daughter newly purchased house in which we have borrowed over a mil dollar in home loan to secure our daughter dream. My wife and I have our names with our daughter in her new house deeds. What is the best option to have our old house to be built?
Note: Our current bank lender is keeping both the old house and my daughter house deeds.
Thank you,
Robert
Hello Robert,
Thank you for your inquiry.
We have a full-guide about home renovation and the different lending products you may take advantage from such as construction loans. Please take note that although some of them may still require some deposit (around 5-10%), they may be the most suitable option in the long-run in terms of interest repayments and by consideration of your capacity to pay.
You may consider pre-approval with your current bank or speak to a mortgage broker to get into the numbers of knowing how much you need to spend versus your renovation goals.
Hope this helps.
Cheers,
Jonathan