What You Need to Know About Land Loans Ontario?

Building a home or office from scratch can be an exciting journey. It gives you the chance to create the perfect space just as you envision it. But before you start planning your dream property, you first need to know about land loans in Ontario and secure a piece of land.

Buying land isn’t the same as getting a loan for an existing house or commercial building. Instead of going through a traditional mortgage lender, you’ll need a specific type of loan called a land loan. 

These loans often come with different terms, and sometimes they might not be as favorable as home loans. 

However, that shouldn’t discourage you from pursuing your dream of land ownership. Here’s what you should know to get started.

What are Land Loans?

Before moving further, it is important to know about land loans. A land loan is a type of loan you take out to buy a piece of land. 

A land loan works differently from a mortgage for a house. With a home mortgage, the lender has a house to use as collateral. 

In contrast, a land loan is riskier for the lender. That’s because there’s no house on the land yet. This added risk can lead to different loan terms. As a result, land loans often come with higher interest rates and stricter requirements.

Why Choose a Land Loan?

There are several reasons to consider a land loan in Ontario. Here are a few:

• Investment Opportunities: Buying land can be a smart investment. As the area develops, land values can increase.
• Custom Building: If you dream of building your own home, a land loan can help make that dream a reality.
• Recreational Use: Some people buy land for recreational purposes, like camping or hunting. An Ontario land loan can help you secure that getaway spot.

What are the Types of Land Loans in Ontario?

If you are planning to land financing in Ontario, don't hesitate to explore your choices. There are three main types of land loans in Ontario:

1. Raw Land Loan

This is for land that hasn’t been developed at all—no utilities, no roads, just untouched land. These loans are the hardest to get because they’re the riskiest for lenders.

2. Serviced Land Loan

This is for land that has some utilities already in place, like water, electricity, or sewage lines. It’s easier to get a loan for serviced land because the infrastructure is partly there, which reduces the lender’s risk.

3. Construction Loan

If you plan to build a house or other structure on the land, you might qualify for a construction loan. This loan covers both the cost of the land and the building. It’s often easier to get than a raw land loan because the lender knows you plan to add value to the property by building on it.

How Much Money Do You Need to Put Down?

With land loans, you’ll need to make a larger down payment than with a typical home mortgage. 

While home buyers might only need 5% to 20% down, land loans often require at least 30% to 50%.

If you have a unique plan for what you want to do with the land (like building a house), the lender may offer better terms. Be ready to put down a significant amount of money upfront.

How to Qualify for a Land Loan?

Qualifying for a land loan is similar to getting a regular mortgage, but there are some differences. Here’s what you need to finance land in Ontario:

1. Credit Score

Yes, your credit score matters. A higher score can help you secure better rates. However, lenders usually look for a score of 680 or higher for land loans. If your score is lower, consider taking time to improve it before applying.

2. Down Payment

Most lenders require a larger down payment for land loans compared to home mortgages. You might need to put down 20% to 30% of the land’s purchase price. This shows the lender you’re serious about the investment.

3. Income and Debt

Lenders will want to know your income and existing debts. They’ll look at your debt-to-income ratio to determine if you can handle the loan payments. It’s best to keep your debts low and show a steady income.

4. Land Use Plan

Lenders may ask how you plan to use the land. Having a clear plan, like building a home or developing a property, can strengthen your application.

Where Can You Get a Land Loan in Ontario?

As we know several types of lenders offer land loans in Ontario:

• Banks: Major banks can offer land loans, but they have strict lending criteria. They might require higher down payments and prefer borrowers with strong credit scores.
• Credit Unions: Credit unions have more flexible lending policies than big banks. Also, they may offer better rates and be ready to work with buyers who have smaller down payments.
• Private Lenders: Private lenders are another option if you don’t qualify for a traditional land loan. However, private loans come with higher interest rates and fees.

Remember to look around and compare different lenders to find the best deal for your situation.

Should You Get a Land Loan?

A land loan is a good option if you’re serious about buying land in Ontario. But don't have the cash to buy it outright. However, you should recognize the higher costs and risks compared to a traditional home loan.

If you’re ready to build or have a clear development plan, a land loan can help you make your dream property a reality. 

However, if you’re buying land as an investment or without a plan, think carefully about the costs before proceeding.

Conclusion

Land loans Ontario can open up exciting opportunities in Ontario, but they come with unique challenges.

So, if you’re ready to explore a land loan, LendingHub.ca is a great place to start. We assess the land and its potential, often offering better terms. 

You can also check online. Our online brokerages have lower costs, allowing them to offer you lower rates and fewer fees. This can make your land loan more affordable.

FAQ

How much do I need for a down payment? 

You usually need to pay 30% to 50% of the land's price upfront.

Are interest rates for land loans higher? 

Yes, land loans usually have higher interest rates than regular home loans.

Where can I get a land loan? 

You can get a land loan from banks, credit unions, or private lenders. It’s good to compare options.