Could you get a mortgage for land in Canada?

Now that you have finally mustered the courage and made the decision you kept stalling for a while, it is about time we start taking concrete steps to build your dream house! But wait, a ready-built home needs at least 5% as a down payment, which in itself is quite a significant amount. Could you purchase some land and then build the house per your convenience and specifications? Sounds good! Yes, this is an option that many buyers in Canada prefer. The next question that might come to your mind is -Will I get a mortgage for purchasing land in Canada?

Fortunately, the answer is YES! You can choose from different options based on the type of land you intend to purchase- whether you intend to build a house on it, do agriculture, etc. The location of the land and the amenities that are available alongside the vacant land also decide on the amount of finance that can be offered to purchase the land. Also, factors like the initial down payment you would need to make to buy the land would differ based on the type of land.

How much does one need to pay as a down payment to buy land in Canada?
Let us take a look at the different types of lands and the down payment they ideally need before finance is made available to you:

1. If the land is in a city, has well-developed amenities, and is in a zone where people already reside, it will need approximately 20-30% of the total amount required to purchase the land as a down payment.
2. If the land is in a rural area, has well-developed amenities, and is in a zone where people already reside, it will need approximately 30-40% of the total amount required to purchase the land as a down payment.
3. If the land is in a rural area, has partially developed amenities, and is in a zone where people already reside, it will need approximately 35-50% of the total amount required to purchase the land as a down payment.
4. If the land has some amenities and could be used for agriculture, it will need approximately 35-50% of the total amount required to purchase the ground as a down payment.
5. If the land has no amenities and could be used for agriculture, it will need approximately 35-50% of the total amount required to purchase the ground as a down payment.
6. If it is farming land, it will need approximately 20-25% of the total amount required to purchase the ground as a down payment.

So now we know that the down payment required to purchase land is significantly higher when compared to the down payment needed to buy a house; what one also needs to know is that apart from the down payment, there are a couple of other transaction charges which may be required to be factored in like Appraisal fees, Legal charges, Brokerage, Land transfer tax, Harmonized Sales Tax/Goods and Service Tax as applicable.
Depending on the value of your purchase, an appraisal could cost anywhere between $ 350 and $600 in rural or residential areas. The legal charges could be between $1000 and $1500, and the brokerage fee could go as high as 1% of the total transaction value. Land transfer tax can be up to 1% of the purchase price, and Harmonized Sales Tax/Goods and Service Tax costs do not apply to all purchases. There are some provinces in Canada where you are not required to pay Harmonized Sales Tax/Goods and Service Tax costs.

What are the different types of financing options available to buy land in Canada?
Some common financing options for land purchases are land mortgages, construction mortgages, agricultural loans, home equity loans, seller financing, private lenders, and personal loans.

Let us take a look at each one of them:

Land mortgages:
A land mortgage tends to have a higher down payment and interest rate when compared with a traditional residential mortgage, as banks usually consider a ready-built house as better collateral for a loan than vacant land. If you happen to default on the loan, it is easier to sell a house than a piece of land. The value of the land would vary depending on the type of land, its location and the purpose it is intended to be used for. Hence, banks would always charge a higher interest rate and expect you to make a larger down payment so that their risk is minimized to the maximum extent possible.

Construction mortgages:
In this type of mortgage, the bank provides you with a loan to purchase land and build a house on it. It is offered in different stages in various phases of building construction. The first stage is usually towards buying the ground; the subsequent step is making the house. It is a good option as you would need to take one mortgage to purchase land and then later take a second mortgage to build the house whenever you are ready.

Agricultural loans:
Suppose you are looking to buy land to do farming. In that case, the Canadian Government might encourage you through the Canadian Agricultural Loans Act (CALA), designed to help and promote the growth of farming. The program encourages lenders by offering a guarantee of up to 95% of the loss in case of a default. Also, the down payment required can be as low as 10%. Also, agricultural loans can get up to 500,000 CAD for investing in land, farming equipment, buildings, and other uses.

Home Equity loan:
If you are a homeowner already, you can use the home equity of your existing house to buy vacant land. This is done through a Home Loan Equity Line of Credit (HELOC) to borrow money from a lender against the house’s current value. The interest rates on HELOC loans are quite attractive as they are secured loans.

Seller Financing:
This option is only seen sometimes when the land seller is willing to become the lender himself. A down payment is made, and the remaining amount is made in regular payments, like a mortgage loan. Though you will be allowed to use the property, the legal title of the land will be transferred to your name once the payments are cleared in full.

It is also possible to combine seller financing with a traditional loan, as the seller may need to be in a position to offer the entire amount required to purchase a finance option. A good thing about this kind of arrangement is that you can negotiate the down payment needed and the repayment terms, which is not possible to a full extent in a traditional loan.

Private Lenders and Personal Loans:
We suggest you opt for a personal loan to buy land in Canada only when you need some amount to bridge the gap between your savings and the amount required to purchase the property.

Private lenders offer short loan periods with high-interest rates, so use this option only when you have run out of all other options.

What is required to qualify for a mortgage for land in Canada?
Borrowers are usually required to have a high credit score, a good income source, and proven employment records. Apart from this, detailed information about the land that is being purchased and a summary of your current assets and liabilities will be required. Your application with all the above details is forwarded to an underwriter at the financial institution which is helping you with the land mortgage. The lender also examines your debt-service ratios to determine if it is within the prescribed guidelines.

Who are some good service providers who help get a mortgage for land in Canada?

Some good and reliable service providers who engage in helping you get a mortgage for land in Canada are:

Scotia International Bank
BMO Farm Mortgage
Landmark Credit Union
Freedom Capital
City Can Financial
Wayne Bank

Conclusion:
Since vacant land differs from a ready-built house, financing for vacant land may be difficult. However, there are a number of options that one can choose from to ensure that they get the best deal possible.

FAQ’s:
1. Can I use the land as a down payment for purchasing another land?
Yes, some financiers give you the option of using a piece of land as a down payment for purchasing another land, provided the former land has value in equity, which is a certain percentage of the sales price, and the land has no lien on it.
2. What is the lowest down payment for land?
The lowest down payment would be 10% for agricultural land.
3. Is it very hard to get a mortgage in Canada?
No. If your credit score is above 660, you are seen as a low-risk candidate for defaulting on your loan and hence, getting a loan is quite simple.