Land Loan Options in Canada
If you’re looking to get financing to buy land in Canada, there are different types of land loan options that are available to you.
What You Should Know
- Land financing sources include land loans, construction mortgages, agricultural loans, second mortgages, and seller financing
- Raw land can require a down payment of as high as 50%, with high interest rates for raw land loans from private lenders
- Construction mortgages provide funding for purchasing the land and building a home on the land
- Second mortgages, such as a HELOC or home equity loan, allow homeowners to use their home equity to purchase land at a low interest rate
- The government assists farmers in purchasing land through the Canadian Agricultural Loans Act (CALA) Program
- Seller financing lets you skip the banks and make payments directly to the seller in exchange for the land title once the land is fully paid off
Types of Land Loans
Can you get a mortgage for land?
Many lenders offer vacant land loans or raw land loans, which are used to purchase undeveloped land. Some lenders call the raw and vacant land loans as land mortgages, but they differ from traditional residential mortgages. You can also get a construction mortgage if you want to both buy the land and build a home on the land. Some lenders consider purchasing land and holding it for future development to be a commercial mortgage, especially if the amount is particularly large.
Land Loans
Residential mortgages are secured loans that have the property as collateral, which includes both the land and the home. Raw, vacant, and lot land loans are only secured against the land since they won’t have an existing home or structure. If the borrower of a land mortgage loan defaults, the lender might have a harder time trying to find a buyer and to sell the property if it is undeveloped in a foreclosure or power of sale. This is especially true for raw land loans, which might not even have road access or utilities.
This makes land mortgages and land loans a riskier type of loan for lenders compared to a residential mortgage. To make up for this, those looking to get a mortgage or loan for land in Canada will have to make a large down payment and face a high interest rate. Lenders can require a down payment of 50% for raw land, especially if you’re planning on holding the land long-term as an investment property, but this requirement can be lower for serviced lots or if you’re planning on building on the land soon. Vacant land in urban areas can have a down payment requirement of around 20% to 30%. It is important to note that if you are planning to build an investment property there, you should also consider the costs of building a house. You may have to calculate the amount of concrete, wood, and other materials required to build a house before understanding how much the construction will cost.
You can get a land loan by connecting with a private mortgage lender or a mortgage broker that works with alternative lenders.
Construction Mortgages
Construction mortgages, also known as construction loans, allow you to borrow money to buy land if you plan on building a custom home on that land. Construction mortgages let you borrow money in stages, called “draws”, that are released at certain milestones. The mortgage will cover part of the cost to build the home as well as the cost of the land. The first draw is usually used to purchase the land lot if the borrower doesn’t already have a plot of land to build on.
Construction mortgages require only interest payments during construction. Lenders that offer construction mortgages include RBC and Meridian Credit Union construction mortgages, and Scotiabank’s Home Builder Loan.
RBC’s Royal Bank construction mortgage provides financing for up to 65% of the appraised value of the land in the first draw. You will need to have the home’s foundation completed within 180 days of borrowing the first draw to purchase the land.
Agricultural Loans
If you’re looking to buy land for a farm, all of Canada’s major banks offer farm loans to help finance your purchase of farmland. You can also use the funds to purchase equipment and to construct farm buildings. This includes:
- CIBC Farm Mortgage Loan
- BMO Farm Mortgage
- TD Long Term Farm Loan
- RBC RoyFarm Agriculture Mortgage
- Scotiabank Farm Mortgage Loan
The Canadian Agricultural Loans Act (CALA) Program offered by the federal government helps farmers and potential farmers by providing up to $500,000 in loan guarantees to lenders for loans used to purchase land and to construct buildings on the land. CALA loans are available from Canada’s major banks and credit unions, with a down payment as low as 10% to purchase land.
HELOCs and Home Equity Loans
If you’re a current homeowner with equity in your home, you may be able to use a home equity line of credit (HELOC) or home equity loan to borrow money to purchase land. You can use the funds from a HELOC or a home equity loan for anything, which includes land. Be aware that HELOCs might only require interest-only payments. While using a HELOC to buy land will have a smaller required monthly payment, it would still be a good idea to increase your payments to pay down your principal.
If the land isn’t particularly expensive, you may consider getting a personal loan to purchase the land, or even using only your savings.
Seller Financing
Seller financing, also known as vendor financing, owner financing, and vendor take-back mortgages, is when the seller of the land allows you to purchase their land with a loan provided by them. The seller will act as a lender, which means that you will be making regular payments with interest to them.
Instead of having to pay the full amount to the seller and needing to get financing from a third party lender, seller financing allows you to not have to worry about applying for a loan from banks or other lenders. This can be helpful if you’re having a difficult time getting approved for a land loan, such as if you have a bad credit score.
One type of seller financing is called contract for deed, which is also known as an installment land contract. When you purchase land from a seller with an installment land contract, the seller will still keep the title to the land while you make loan payments to the seller. Once the land loan is paid off, the seller will transfer the land title to the buyer.
Another type of seller financing is a deed of trust, which is similar to a regular mortgage. The land buyer who is borrowing from the seller will get the equitable title of the land, while the legal title will be held by a trustee. This third-party trustee will usually be a title company. Once you pay off your land loan that was lent to you by the seller of the land, you’ll receive the legal title of the land. In the meantime, having the equitable title means that you benefit from any increases in the value of the land, which is similar to a traditional mortgage.
You can mix seller financing with other land loan options. This can be helpful if your lender isn’t willing to let you lend the entire purchase price of the land. For example, a land loan lender might be willing to let you borrow $100,000 for land that the seller is selling for $150,000. You may be able to negotiate a form of seller financing for the remaining $50,000 from the seller.