Subdivision Home Loans Comparison
If you want to subdivide land with a mortgage to fund the project, here's how to compare loans.
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Subdividing land to create the space for more property's can substantially increase the land value, without requiring any physical changes. When subdividing land with a mortgage, there are a few hoops to jump through with a lender, but this guide explains all the steps involved.
If you’re an investor, you could turn a good profit by subdividing a property into smaller lots. There are several factors you need to consider before deciding whether or not subdividing is the right option for you, so read on to discover the ins and outs of the subdivision process.
Compare subdivision loans
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
What is a subdivision loan?
If you need finance to cover the cost of subdividing land into two or more blocks, you might need to apply for a subdivision loan. As every subdivision project is different and has its own unique requirements, subdivision loans can be structured in a range of ways.
Subdivision loans can be used to cover the cost of:
- Subdividing a piece of land, including all fees and charges that apply
- Building infrastructure required for your subdivision application to be approved
- Demolishing a pre-existing home on the property
- Covering your surveyor’s costs
- Constructing new homes on the subdivided lots
Subdivision loans typically allow you to use an existing home on the block of land or the land itself as security. However, the way these loans are structured varies greatly according to your needs, so ask a mortgage broker to help you find the right financing for your subdivision project.
Features of subdivision loans
- Normal interest rates. Subdivision loans are typically available with standard home loan interest rates from mortgage lenders.
- Loan security. Many subdivision loans are secured with an existing home or the block of land itself. However, in some cases the homes you plan to develop on the subdivided properties can be used as security for the loan.
- LVR. Although the amount you can borrow varies according to the lender and your financial situation, many lenders allow you to borrow up to 90% LVR of the security property or properties.
- Up to three dwellings. Subdivision loans are usually only available for the construction of up to three new homes on subdivided land. Funding for larger projects will often need to be obtained through a commercial loan.
- Construction component. If you’re planning on building new homes on the subdivided lots, some loans will feature a construction loan component. This allows you to make progress draws at pre-established stages of the construction process so that you can pay your builder.
- Lending requirements. You’ll need to inform the lender fully of your subdivision plans before you will be approved for a subdivision loan. This means you will need to provide copies of council approvals, surveys and more during the application process.
Why should I subdivide a property?
The benefit for subdividing property is backed by simple logic. If you own a large property in a well-located suburb, you can increase the value of the land by dividing it into separate lots and selling each lot separately. For example, if your block of land is worth $1 million, subdividing it into three separate properties and developing each block of land could allow you to sell each lot for $600,000 – resulting in a total value of $1.8 million.
However, you don’t necessarily need to sell each lot. Instead, you might want to keep one lot for your own use but sell off the other two properties. There are other subdivision options available such as splitting a single strata title up into multiple titles, or creating a separate lot on land you own to construct a granny flat.
For home buyers, subdivided properties are more affordable, which makes it easier to purchase a home in a sought-after area. Low-maintenance yards and a smaller home to look after are other potential benefits.
If you own land and you’re looking to increase equity, build wealth or simply expand your property portfolio, subdividing a property may be a good approach — but there’s a lot you need to take into account before deciding whether or not it is the right decision for you.
What you should be aware of with subdivision loans
There are several factors that can influence the actual lending process and the quality of the work. Before signing the contract during the application process, keep the following in mind:
- Demolition costs. If your house sits on the property you want to subdivide, check to see whether this house will be able to remain in place when you split the property into separate lots. If not, you’ll need to factor the cost of demolishing the house, which can be tens of thousands of dollars, into your calculations. You may find that this extra expense on top of the cost of subdividing makes the process unprofitable.
- Capital Gains Tax (CGT). If you retain ownership of each block of land after subdividing a property, you won’t have to worry about CGT. But if you sell the subdivided blocks and make a capital gain or loss, you’ll need to factor CGT into your cost equations.
- Size matters. Local councils usually have requirements regarding the minimum size for a block of land that can be subdivided. In many cases, the minimum is 700 square metres.
- Level land is best. Land that is flat is generally much easier and cheaper to subdivide than a sloping block. Sloped sites also restrict the opportunities for future development, so keep this in mind when choosing a block of land. Similarly, you’ll most likely find it’s easier to subdivide a square or rectangular block than it is to subdivide an L-shaped or battle-axe block.
- Corner blocks work well. Some corner blocks are ideally suited to subdivision as they allow you to create two separate properties that each have their own street frontage and access. However, keep in mind that you may have to meet extra costs to ensure that both properties have a kerb and guttering in place.
- Fees apply. From surveyor and solicitor fees to DA fees and infrastructure charges, subdividing a block of land can be costly. Make sure you’re aware of the full cost of the project before you over-commit yourself.
- Connection can be costly. Another expense to consider is the cost of ensuring that any new lots can be hooked up to utilities. Establishing sewage connections and establishing adequate stormwater drainage can be prohibitively expensive.
- Loan costs. Remember to consider subdivision loan fees and charges, for example application fees, ongoing fees and interest costs, when working out how much you can afford to borrow.
- Zoning rules. If you want to build medium-density housing on a block of land, will the council’s zoning regulations allow you to do so? Check with your local council before you buy.
- Know before you buy. Before you buy a property that you plan to subdivide, do your due diligence to find out how difficult it will be to subdivide in that particular area. If there are plenty of other subdivided properties around then that is always a good sign, but research the planning and approval process so you can work out your chances of success.
- Get expert help. The best way to minimise stress when subdividing and increase your chances of approval is to get help from a registered licensed surveyor. A surveyor will know all the ins and outs of your local council’s planning and development regulations, and will be able to tell you exactly what is and isn’t possible to do with your property.
What Steps Should I Take Before Buying Subdivision Loans?
Subdividing a block of land into two or more new lots sounds like a simple way to make some profit or increase the amount of equity you have in that property.
In reality, there's a lot of work to be done before you even begin your subdivision project.
It is important that you spend some time doing your due diligence before buying a subdivision loan. Far too many investors think about the obvious costs of their impending subdivision, but they forget to include the costs of the loan. The interest charges on this type of loan may change the overall return you thought you were making on your investment, so make sure you incorporate all your costs before you begin.
You still need to be aware of the implications surrounding the property and any changes you intend to make to it. This means understanding what council zonings mean and what permits you might require before you're able to proceed with developing the land.
There are some areas that may not allow you to do what you want to do with the land. Some council areas have minimum lot sizes they require for subdivision purposes. Others may have zoning requirements that state the properties need to be used for commercial or industrial use, instead of for residential use. You need to understand your limitations and restrictions here before you proceed.
On top of this, you also need to know as much as you can about what the property might have been used for previously. Land can be contaminated with toxic waste or other chemical residue, depending on the use.
Once you've done some background research, you need to work out if the land has any easements placed over it. A title search can reveal this information. An easement may include council-accessed storm water run-off pipes running under a boundary fence, or any areas on the land where construction will not be approved. This can be crucial to the success of your subdivision plans.
Do your market research on what vacant blocks of land are selling for in the immediate area right now.
Be sure you compare allotment sizes accurately based on what your newly-subdivided block sizes will be. This will give you a better indication of whether your efforts and your total costs will generate a profit in the end or not.
Speak to local agents and council representatives to help you understand the value of your land.
Spend the time writing out your entire project costs and projections on paper or in a spreadsheet. List down all the costs in as much detail as you can. Include the following:
- Purchase cost
- Stamp duty
- Conveyancing costs
- Surveyor costs
- Council developmental approval costs
- Subdivision costs
- Council rates
- Estimated interest charges on the mortgage over the duration of the project
- Construction costs (if any)
- Real estate agent costs
You also need to consider your market research in the same feasibility study. This should include the following:
- Sale prices for comparable blocks of vacant land in the area
- Time on market for vacant land for sale in the area
- Difference between selling vacant land or off-the-plan house and land packages through a builder
These costs will give you an idea of the feasibility of your project overall. It will also help you understand whether you have sufficient funds to complete your project.
How can I subdivide property?
Subdividing property sounds like a straightforward process, but there are plenty of hoops you need to jump through before you can make it happen. Before you can get started on your subdivision project you will need to seek approval from your local council.
Every council has its own regulations and requirements for subdivisions, such as:
- Minimum size requirements
- Zoning rules
- Driveway access for each lot
- Sewer and drainage requirements
- Building height
- Council regulations. The first step is to research the subdivision process and contact the local council to understand the work and costs involved. This will help you identify whether or not you can go ahead with the planned subdivision and it will help you make an informed choice.
- Organise finance. Once you've done your groundwork and looked into the local council regulations, you should approach your lender to see what finance options are available to you. It's a good idea to speak to a licensed mortgage broker as they'll be able to help you understand your borrowing power and they can recommend a loan that's suitable for your subdivision project.
- Buy a block of land. Look for a property in a growth area with a proactive council that allows you to subdivide land. Site-specific requirements such as the size of the block and whether or not it is level should also be taken into account.
- Submit development application (DA). DAs are often specific to where you live so contact the local council to find out exactly what forms you need to submit. Ask an experienced surveyor to manage your application, and remember that the plan will need to be submitted to the titles office so that new land titles can be issued.
- Develop the properties. Once you’ve ticked all the necessary boxes and the subdivision has been approved, you can develop homes on the subdivided lots.
What Types of Subdivisions Are Available?
When you're considering a subdivision project, you do need to be aware of the different types of subdivision types available. You'll find that different council areas will have varied requirements for a range of allotment sizes, along with specifications for the type of property that can be constructed on each type of allotment type.
Torrens Titled Subdivision
A Torrens titled subdivision means that each individual block created will be a stand-alone block with an individual title. Homes built on these blocks tend to be fully detached, freestanding, individual homes, as opposed to a block of units or a semi-detached duplex property. Torrens titled blocks tend to be slightly large as a minimum requirement than other types of subdivision with most council areas. The owner or owners of the newly-created blocks don't have to answer to Strata managers or strata rules.
Strata Titled Subdivision
A Strata titled subdivision allows you to divide a vacant block of land into separate units, apartments or even semi-detached villa homes. Most Strata titled subdivisions include an area of commonly shared land which are most often areas such as driveways. These common areas are shared by each Strata title holder and are managed by the Strata manager.
Community Titled Subdivision
A Community titled subdivision is one where each owner of each block shares common property. This usually includes areas such as the driveways that are used by all the residents.
Who should use a subdivision loan?
Anyone who intends to divide one existing title into two or three new titles needs to use a subdivision loan. This type of loan can also be used to fund construction of the development.
This loan type is ideal for anyone who wants a mortgage that will be secured by the vacant land or the existing house as security. It can also be set up so that the actual homes to be built become the security for the construction portion of the loan.
Throughout the construction phase of a subdivision project, progressively drawn payments will apply. Once the buildings have reached practical completion and you have taken ownership of them, the loan will revert to a standard mortgage.
Keep in mind that a subdivision loan is suitable only for up to three dwellings to be constructed. Larger subdivision projects of four or more properties may require a commercial loan, rather than a residential home loan.
There are several strategies for subdividing a block of land, including:
Split off a section of existing land
There are times when it may be possible to purchase a home that features a large back yard. You may want to split off a portion of this land and sell off the newly created block of land. This allows you to keep the existing home with its reduced land size, but the sale of the land lets you reduce your mortgage without losing the original property.
Subdividing for vacant land
Vacant land is at a premium in most capital cities in Australia. Finding a large vacant block or buying an existing home on a large block of land allows you to demolish that property and split the block into two or three smaller blocks. You can then sell off the land for a potential profit.
Subdividing to develop new dwellings
There are times when the sale prices of new homes in an area end up worth more than selling off vacant land by itself. In this case, you may want to split a large block into two or three smaller blocks and construct new homes on them. You then have the option of selling them for a potential profit or renting them out as investment properties.
The key to choosing the right strategy is understanding the property market in that particular area. Searching for land with the potential to subdivide is only the beginning of the process. Working out which strategy is best for you will depend on your level of risk tolerance, plus your ability to borrow sufficient funds to complete a project of this size.
For example: you may not be comfortable carrying a mortgage large enough to fund the construction of three new homes, so you may prefer to sell the vacant land quickly and get back out of the market with your money.
Pros and cons of subdividing property
- Build wealth. Subdividing a property offers a sensible way for you to grow your wealth.
- Make money from unused land. If you have a portion of your property that you don’t use, subdividing allows you to turn that unused land into profit.
- Build your property portfolio. In the right circumstances, subdividing can be a simple way to expand your investment property portfolio.
- Flexible finance available. There’s a wide range of subdivision loans available, so start comparing your borrowing options with help from a mortgage broker.
- Can be expensive and time-consuming. While subdividing may sound like an easy strategy to make a quick profit, there are risks you need to consider and obstacles to overcome before you may be allowed to subdivide land.
Subdivision Loans FAQ
What is the first step I should take to assess a potential subdivision site?
The very first thing you need to do is obtain a survey of the exact land size. This will tell you if the land is large enough to be subdivided under that council area's particular subdivision and zoning allowances. This will also show you if there are any easements or encumbrances that may affect the land.
Who else should I speak to about my subdivision?
You should discuss your plans with your solicitor. A good solicitor will be able to assist you in checking whether there are any restrictive covenants or easements. Some new estate areas contain covenants over them that won't allow for subdivision of existing blocks.
You should also discuss your plans with a good accountant, as your financial situation and your mortgage structure will be important factors for the overall success of your subdivision project.
When you've done this, you should speak with a mortgage broker who has experience dealing with subdivision loans.
Are services readily available to be extended to the new block?
Always take the time to check the sewer diagram for the existing block of land. You may also want to check for other services, such as electricity, gas mains, water mains and even telephone lines. This will give you an idea of whether existing services are able to be extended to service the new block cost effectively.
How many new blocks of land should I create?
The actual number of new titles you're able to create from one existing block of land will be dictated by your council area's subdivision guidelines and their zoning regulations. You may find that minimum sizes for land intended for the construction of fully detached homes needs to be larger than land intended for units to be built. Some estates may also have covenants held over them that restrict further subdivision of land in those areas. It's important to research these things before commencing your project.
Where do I find the council's subdivision guidelines?
Most council areas make their subdivision guidelines and zoning regulations readily available from their websites. You can download these and read through them to check whether your intended site fits within those guidelines. If it doesn't, you can either amend your plans to suit them accordingly or choose not to proceed with the project.
How do I know if my subdivided vacant land will sell?
Take the time to research the market in the surrounding area. Look for vacant land that has recently sold and know what sized blocks are fetching what price ranges. Newly constructed homes in the nearby area are also a good indication that the area is being developed further. The idea here is to establish whether there is a demand for vacant land in that area before you proceed.
Should I sell subdivided land or should I develop and build dwellings?
Your overall subdivision strategy is completely up to you and your research into the feasibility of the project. You may find that selling land is quicker and more profitable in some areas. Other areas may provide better returns for developing the newly-created blocks yourself and building new dwellings.
Keep in mind that the interest costs on your subdivision loan during the construction phase need to be carefully considered before you undertake a large project like this. Always be sure you've accounted for all potential costs, as well as researched the market conditions for the area your block is in before you proceed.
Examples of Subdivisions
Case Study: John and Mary
John and Mary own a home on a large block of land. They're lucky enough to have this on a corner block, so the property has two road frontages. They have decided that the large back yard can be subdivided off to create a brand new block of land that faces the side street.
This allows for a new dwelling to be constructed with its own driveway access without affecting their original home. They paid $600,000 for their home. They intend to sell the newly-created block of vacant land for $275,000, which helps to reduce their mortgage size but still lets them keep their home.
Case Study: Mike and Jo
Mike and Jo have purchased an old home on a large block of land. They intend to demolish the existing property and subdivide the land into three smaller new blocks of equal size. They conducted some market research and do their due diligence to learn that developing the blocks themselves is likely to be a more profitable for them rather than selling vacant land in that area.
Mike and Mary currently own their own home. This is valued at $750,000. They used this property as security to borrow the entire amount of their project on a subdivision loan.
|Purchase Existing Dwelling||$480,000|
|Stamp Duty & finance costs||$25,500|
|Construction Costs (3 new dwellings)||$510,000|
|Interest Costs for duration of project (at 6.56%)||$52,480|
|Total Project Cost ($369,160)||$1,107,480|
|Total Sale Amounts ($450,000 each)||$1,350,000|
|Total Potential Profit||$242,520|
The original purchase price on the old property they demolished was $480,000. After all the costs for the subdivision project were added together, it came to more than $1.1 million. The project took 12 months to complete, so interest costs had to be taken into account.
When divided into 3 to give an individual cost for each separate dwelling being built, this comes to a cost of $369,160 per home. Fortunately for Mike and Jo, the resale value of new homes in that area is a median of $450,000 each.
Case Study: MegaCo Widgets
MegaCo Widgets is a professional development company that builds apartments in several major cities. They have been doing this for several years and all of their subdivision loans and their properties are all with the same bank. When their bank decided not to support them any longer, they were left with an unfunded project for which they intended to build 120 townhouses.
This required approximately $30 million in total construction costs on a property they had already purchased. To help them find a solution, the company approached a specialist mortgage broker with vast experience in this area.
The project for 120 townhouses was scheduled to be built in three separate stages. The first stage included construction of 50 townhouses for a cost of $13.5 million. They intend to apply for further funding after stage one is complete.
The company has a long-standing relationship with another firm that has decided to purchase 34 of those first 50 townhouses. The total cost for purchasing 34 of their properties came to $10.25 million. The firm offered MegaCo Company a 5% deposit on each property.
With this agreement for pre-sales in place, the funding was made much easier. The lender agreed to finance the total of $13.5 million, along with accepting the 5% deposit payment amounts made by the firm on their pre-sale agreement. Once the properties were completed, the sales were finalised for the total $10.25 million. This left the company with 16 townhouses remaining to sell or keep as future assets. The original $13.5 million loan was then paid down to $3.25 million, at which time the company then applied for further funding to commence stage two of the development construction.
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