For those looking to get away from the city and start a new chapter living life on the land, a rural home loan might be able to help you get there.
If you’re dreaming about clean air and peaceful nights, if you want to raise kids away from the city or enjoy your retirement in tranquility, there’s a chance you’ll need to need to find out about specialised rural home loans.
Rural home loans are specialised loans designed to help people buy rural properties for personal or business use. If you think you might need such a loan, it’s important to educate yourself about how to choose the best rural home loan for you.
How do rural home loans work?
A loan for a rural property can be used for both business and personal purposes. Often described as a hobby farm, it’s not generally easy to get approved for. With Australia’s history of droughts, the global economic downturn and an unstable rural property market, many banks and lenders just aren’t willing to take the risk. However, if you are looking at a hobby farm or a residential rural property and don’t plan to turn your new property into your primary source of income, a rural home loan might be just right.
What is a hobby farm?
When we are talking about rural property, it's important to make the distinction between a hobby farm and a commercial farm. Hobby farms:
- Are primary residential properties
- Are not used for commercial income purposes or as a speculative investment
- May be used to raise livestock or to grow crops, but this must be for the purposes of recreation or lifestyle, for the enjoyment of the owners only
- Are valued only on the weight of the land and any buildings on it. No machinery, livestock, crops or otherwise rural income-producing assets will be included as with commercial farms.
Compare Land and Rural Home Loans
How much deposit do I need for a rural property?
The deposit you'll need for a rural property will depend on the size of the property.
They can require deposits of as small as 5%, or as much as 30% depending on the size of the property and where it is.
You are typically much more likely to be looked upon favourably if your property is under 10ha. Banks are more hesitant about larger properties, and above 200ha banks are likely to be very conservative in their lending. That being said, rural home loans are designed for these purposes exactly, so educate yourself about which lender offers the best loan contract and be prepared for your application.
Of course, if you have a larger deposit you are able to borrow more to spend on your rural property. If you don’t have 20% of the total cost upfront or you’re not even close, you may still be able to apply for a specialised rural home loan that leaves you with some options. Because it’s generally considered to be a riskier area from a lender’s point of view, any equity you can provide (such as from a family home) as well as your deposit and proof of repayment potential will help in securing your rural home loan.
How do you compare rural home loans?
- Maximum loan amount. Do your research and find out how much you can borrow and from who. Not all banks and lenders will offer the same loan amounts. As a general rule, the higher your deposit, the more you will be entitled to borrow.
- Maximum Loan to Value Ratio (LVR). LVR is the amount of money you are borrowing balanced against the value of the property. Banks and lenders will have different policies about LVR and it pays to shop around to see who is offering the best deal.
- Offset account. Making use of an offset account with low fees and great features can be a huge helping hand when you are paying off a home loan. It could potentially save you thousands of dollars over the life of your loan.
- Repayment flexibility and loan options. As is the case with all home loans, finding a lender and a contract that suit your specific needs is of paramount importance. Check features such as the ability to make extra payments without incurring extra charges, the flexibility to choose the frequency of your repayments and whether you are able to make interest-only payments for a certain period.
- Redraw facilities. Check the applicable redraw facilities and any fees. Being able to redraw from your home loan can take the pressure off during the tighter months and help you stay relaxed and on track.
Some key points to consider before packing the kids and moving to the country
One reason why banks and lenders are typically more hesitant to lend for rural property sales is that they are riskier. If it’s your dream to live on the land then resources are available, but before you make the leap there are some factors that need to be taken into consideration.
Rural and farm home loans generally require large amounts to be borrowed, which means higher repayments and a longer loan term. Get good advice and don’t rush your decision - it’s worth the extra time taken. Also consider that if you are planning on using your home to generate a secondary income, if you default on your loan you risk losing your home and your business.
Remember that you may incur extra charges from the bank or lender you are borrowing from, such as higher rates on compulsory valuation.
What do lenders look at when you apply for a rural home loan?
Each lender will have their own set of criteria they use to assess whether they will offer a home loan for the purpose of purchasing a rural property; however, some of the main items that may be considered are:
- Land size: There isn't any real maximum land size that lenders will not allow for a rural home loan, but land that is upwards of 100 hectares may not be considered a hobby farm for the purposes of lending. The lender may request you apply for a commercial loan.
- Location: Some lenders have postcode restrictions in place for rural home loans. This means if the property you are looking at purchasing is outside of the lender's approved postcodes, you may need to reconsider the property or look at another lender.
- Property Access: The property must be easily accessible for different reasons. A dirt road is appropriate and often common with rural properties, but it must be well maintained so that any vehicle that needs to can access the property.
- Public Services: The property must have access to public services such as electricity, water and sewage, if you opt to have your property completely self-sustaining it may also be useful to have all the regular services accessible at the property just to make the process of lending easier.
- Area Zoning: In order to be classified as a hobby farm rather than a commercial farm the land will need to be zoned as rural, rural residential or the equivalent depending on the state it is in. If it is zoned as industrial, commercial or for farm use this may impede your ability to get a rural home loan as it may be a commercial farm. The best way to confirm if the property is considered a commercial or hobby farm is to enquire if you will be required to pay GST on the purchase of the property as this only applies to commercial farms.
- Land Use: The land should be used for personal or investment purposes only, not as a fully functioning farm. Some hobby farms with minor farm improvements and no income from farm production can also sometimes be accepted by certain lenders.
How to apply for a rural home loan
If you have made the decision to take out a rural home loan to buy a home outside of the city, doing your research to find the best conditions, terms and borrowing rates is well worth the effort. For specific loans such as rural loans, you are likely to find big differences in the kind of offers available.
It’s advisable to speak with a mortgage broker who understands the intricacies of your needs and can help steer you in the right direction, especially if this is your first move from the city and you are more uncertain about the market and extra costs.
First and foremost, plan for the future and research your possibilities. If you are set on a tree change and can feasibly afford to make the move, put the extra time into finding the rural home loan that’s right for you.
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