How Do Construction Loans Work When You Own the Land?

By Deltos Finance on November 11, 2023
how do construction loans work when you own the land

We’ve all heard the adage, “Location, location, location!” And for many homeowners, having the perfect piece of land is the dream foundation for building their ideal house. But once you have that pristine parcel, the next question beckons: how do construction loans work when you own the land, especially in Australia?

Let’s unravel the intricacies of construction loans in Australia, especially for those lucky enough to already have a plot of their own.

Owning the Land: A Game-Changer for Borrowing Power

You’re not just stepping into the loan game with hopes and dreams; you’re stepping in with tangible land. This is a pivotal factor in your construction loan journey. Here’s a deeper dive into the benefits of owning the land when applying for construction loans:

  • Equity Boost: Your land isn’t just dirt and grass—it’s a financial lever. Owning land can dramatically bolster your equity, enhancing your construction loan borrowing power. In simpler terms, your plot can be your most compelling argument when negotiating your loan terms.
  • Reduced Deposit: Since you’re already invested, quite literally, in your dream, lenders may use the equity in your property in lieu of a cash deposit. 
  • Appreciation in Value: Depending on the location and the duration you’ve owned the land, its appreciation could be beneficial. If your land’s value has increased since purchase, it might further augment your borrowing power.

Can You Use Your Land as Equity for a Construction Loan?

Yes, you can use your land as equity for a construction loan. As mentioned, when you own a piece of land outright (meaning without any outstanding loans against it), its value can be counted as equity. If there’s a mortgage on the land, the amount of equity is the appraised value of the land minus what you still owe. But of course, you have to consider a few factors when going this route:

Land Valuation

Lenders usually require a recent valuation of your land before determining how much they’re willing to lend. This valuation will help ascertain the land’s current market value, which, in turn, determines your equity.

Total Loan-to-Value Ratio (LVR)

Lenders use the LVR ratio to assess the risk of recovering their funds if the borrower were to default. It’s the loan amount as a percentage of the value of the property (in this case, the land plus the proposed construction). Having significant equity in the land can help in achieving a lower LVR, which is often seen as less risky by lenders and can help you avoid paying lenders mortgage insurance if the LVR is less than 80%.

Completion and Conversion

At the end of the construction, most construction loans are converted (or refinanced) into a standard home loan. At this stage, the final value of the property (land + construction) will play a significant role in the terms and conditions of the converted loan.

Debt Reduction 

Any amount you still owe on the land will be factored into your construction loan. The less you owe, the better your borrowing capacity.

construction loan

Let’s Delve Deeper: Pros and Cons of Land Equity Construction Loans

Navigating construction loans can often present various paths and choices. Using your land as equity is one such strategic option. While it comes with its own set of benefits, there are considerations to be aware of, too. Let’s examine the pros and cons of land equity construction loans to equip you with a clear understanding.


  • Increased Borrowing Power: The equity in your land can boost the amount you’re able to borrow for your construction loan.
  • Better Construction Loan Terms: Lenders may offer better terms, given the collateral in place.
  • Lower Down Payment: Your equity might reduce the initial amount you need to outlay.


  • Dependent on Valuation: If the land’s valuation is lower than expected, it could affect the construction loan amount.
  • Higher Risk: Failure to complete construction or repay the loan could result in loss of the land.

What’s the Difference Between a Land Loan and a Construction Loan?

While both are involved with land, they serve different purposes. It also pays to differentiate these two loan types to ensure you’re making an informed decision when using land (with an outstanding mortgage) as equity for a construction loan. 

A land loan focuses exclusively on financing the purchase of land. Its tenure is typically shorter and might have higher interest rates. On the other hand, a construction loan funds the building process and typically merges the land loan into it, resulting in a single mortgage once construction concludes. 

Note that some lenders provide construction loans for homes, whether you’re building your home while buying the land or building on land you already own. 

Lay Your Foundations with Deltos Finance

So, how do construction loans work when you own the land in Australia? They can be complex but rewarding. This is where a construction loan broker, like Deltos Finance, plays a crucial role. Our expertise ensures you secure a construction loan that matches your project seamlessly. 

Get in touch with us today, and let’s craft your dream home from the ground up.

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