Looking into buying vacant land in Canada? Then you need to know that the mortgage financing options for vacant land are different from those for constructed property or home. The vacant land mortgage is often sought after by buyers who plan to commercialize or use the land as an investment property. House mortgages are straightforward where the buyer has to qualify for a loan from the bank or the lender by paying a percentage of the purchase price (most commonly 20%) referred to as down payment, subsequent to which, the buyer is eligible to receive the loan with a certain interest rate.
However, buying a vacant land comes with its own set of financing options that you need to know about, in order to make a decision based on your requirements and budget. The lender would analyze your credit score, income and the projected value of the land before approving and disbursing the loan to you.
Basics of Mortgage financing for vacant land in Canada
The framework for mortgages could be described as a risky bet placed by a lender. The lender lends money whereas it is expected of the loan recipient to provide a collateral or a monetary guarantee so that in case the borrower defaults in payment dues, the lender is able to recover the loaned money. Residential or house property mortgages have the constructed home structure as a collateral.
In contrast, with vacant land, there is little to no collateral for the lender to bet the loaned amount on as the vacant land does not have a property or passive income generating asset. This is why you will discover mortgage payments for vacant lands to be lent with considerably higher interest rates compared to traditional house mortgages. You can also expect to pay the downpayment of around 20-30% or as high as 50% of the total purchase price of the vacant land.
We are going to highlight the three most commonly practiced mortgage options for buying vacant land in Canada.
Unzoned Land Mortgage
An unzoned land is a vacant land that is not regulated by the provincial government for commercial or residential purposes and exists in a remote area with hardly any access to water, roads, sewerage, electricity and infrastructure. Due to the unavailability of a collateral asset or proper infrastructure and facilities, getting a mortgage for an unzoned land is a challenge to conquer. While most lenders show less eagerness in lending a mortgage amount for unzoned lands, a few may agree to it in return for a down payment much larger than that expected of a zoned vacant land. Additionally, the borrower may also be required to present an attractive credit score and a continuous stream of income to convince the lender for an unzoned land mortgage. It is important to note that the buyer must observe diligence while inspecting the unzoned vacant land for any potential limitations or hazards. You may also hire an expert who shall help you survey the property and possibly warn you in case of suspicions.
Zoned Land Mortgage
A zoned vacant land is a regulated and commercialized piece of land that awaits development for a specific type like residential, industrial or commercial. As with unzoned land, zoned lands are lent with a mortgage higher than traditional house mortgage, and a 20% down payment. The borrower also needs to have a good credit score, demonstrate their capability to pay back the loan and must present a plausible development plan to the lender. To steer clear from legal complexities, companies or businesses contemplating to buy a zoned land must vigilantly observe the terms and conditions of the mortgage agreement. In addition to the land mortgage, the loan recipient has to arrange financing for the construction costs during the construction phase.
Construction Land Mortgage
Construction land mortgages are designed for individuals or businesses most often involving builders, real estate developers, investors who are interested in using the vacant land to build homes, industrial buildings or any other types of properties. In lieu of traditional mortgages that are lent on an existing property, a construction land mortgage is structured on the basis of land value and the estimated cost of construction for the planned type of building. Similar to the other vacant land mortgages, the borrower has to show a reliable credit score, a development plan and approximate construction costs and also quote the timeline required for the construction. Once the construction is complete, the borrower may sell the property and refinance the mortgage into a long term mortgage. In Canada, construction land mortgage is offered by various types of lenders including banks, independent lenders and credit unions.
