Vacant land can be a desirable investment because it can create various investment opportunities, such as the ability to lay the foundation for small to large scale development projects or provide the acreage required to support the construction of a custom home, for example.
Even savvy real estate developers buy acreage decades before they intend to develop on it to ensure they churn a substantial profit from building homes that will sell for much more and in a pricier market.
With the exponential rise in property value that has occured in the last ten years in Toronto and the GTA, which has, unfortunately, pushed many aspiring homeowners out of homeownership altogether, many individuals are increasingly more interested in the idea of purchasing vacant land either as an alternative investment for the long term or to simply build their own house avoiding builder fees and inflated costs.
The interest in vacant land has, therefore, generated many questions including which lenders provide this type of financing.
Major Banks and Vacant Land Financing
Often, major banks do not lend on vacant land. Banks finance either residential or commercially zoned dwellings, which act as security for the repayment of the loan.
Without physical property situated on the land, most banks will decline financing. The main reason for such hardline policies is that banks are aware of the risks they may face when trying to re-sell it in a power of sale situation (if the borrower fails to make mortgage payments).
In real estate, it is easier to sell a residential home than it is to sell vacant land. Banks are not in the business to lose money or unnecessarily increase their risk of financial setbacks, so therefore, vacant land financing is a hard stop at this level.
In most cases, to finance vacant land through a major bank, a mortgage product such as a regular mortgage or home line of credit, would need to get registered on an alternate property the borrower also owns that is zoned commercial or residential. This "alternate property" would act as the bank's required collateral.
Building A Custom Home on Vacant Land
A borrower CAN get construction financing through a major bank as well as some credit unions in Ontario under select conditions and circumstances.
What is Construction Financing?
Construction financing allows borrowers to use mortgage funds to provide "draws" at predetermined intervals to complete the final construction of a home. Construction draws simply mean that the mortgage funds are not provided all at once like in conventional loans, but rather, they are provided in stages once certain elements of the construction process have been completed.
When it comes to vacant land and construction financing, if the land needs to be financed, this would be considered the initial equity take out and can be used to purchase the land. When building a custom home, mortgage lenders prefer that the land already be free and clear of any encumbrances. However, in the event the land is not owned outright or can't be purchased free of mortgage financing, a Construction Financing Loan is a smart way to finance both the land and the construction of the dwelling simultaneously.
If you've already consulted with a sub-contractor or property development company, and have plans to start building a property immediately, you may qualify for a construction mortgage with a major bank or credit union which can be facilitated through the broker channel. Depending on where the property is located, banks and credit unions can finance up 95 percent of the vacant land value. If you are working with a home builder, your mortgage can be insured through Canada Mortgage Insurance Corporation if the total cost is less than $1 Millions Dollars.
What happens if you want to buy vacant land and have no plans of building a home right away and also don't have another property to mortgage?
In most cases, if you don't own other properties that a bank can register a mortgage against to be able to give you the funds required to buy vacant land outright, you will likely require alternative or private financing through other companies. Most private lenders will lend a maximum of 80 percent loan to value, which means you would need to have a down payment of 20 percent or more.
I specialize in vacant land financing. Please do not hesitate to reach out for pricing or more information.
Sarah A. Colucci
Mortgage Agent Lic. M14000929
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929