Buying Land and Building a House on it - Costs of Buying Land + Building a House on it and Housing Loan
If you want to buy land and build a house on it, you will first need to pay for the land, and it is common to pay the construction cost of the house in multiple installments from the contract to its completion and delivery. Usually, housing loans are secured by a completed building and cannot be used to pay for land purchase or construction costs incurred before the building is completed. Here is a guide to the loans and their features that can be used to pay for these expenses before completion of a house.
Loan available for land purchase and construction costs
If you want to take a loan for both the purchase cost of the land and the construction cost of the house, consider using a "Land Advance Loan" that allows you to obtain a loan for the cost of the land when you purchase the land and build a custom-built house.
In general, housing loans cannot be used for the purchase of land only. However, if you are purchasing land on the assumption that you will build a house on it, you can borrow the cost of purchasing the land and building the house by submitting plans for the building to be constructed and an estimate of construction costs along with the land purchase contract. In addition, due to the nature of a regular housing loan, which is secured by a house that already exists, the loan cannot be obtained until the house is completed. Since housing loans will be executed after the completion of the building, large sums of money such as the construction start fee and the interim fee at the time of completion of framework, which have to be paid before the loan is executed, must be prepared separately. If you want to cover these construction costs with a loan, you should also consider “Land Advance Loan”.
Another option to cover the cost of land and construction is to take out a “Bridge Loan. A “Bridge Loan” is literally a temporary loan, separate from the housing loan, to cover expenses such as the purchase cost of the land and construction costs that need to be paid before the building is completed and the housing loan is disbursed.
What is Land Advance Loan?
Land advance loan is one type of installment loans (a contract to divide the timing of disbursements on a single loan) and is recommended for those who wish to take a loan for the purchase of the land. The loan is subject to build a house on the land and is disbursed for the land purchase cost by placing a mortgage on the land. For this reason, the interest rate on a Land Advance Loan is lower than that of a Bridge Loan.
The screening process for Land Advance Loan is conducted for land and building at one time. It depends on the financial institution, but the loan may be disbursed in multiple installments during the process from the purchase of land, such as at the timing of “land purchase”, “start of construction of the house,” “topping-out ceremony,” and “completion and delivery of the house”.
First, the loan for the land is disbursed at the time of the land purchase contract and can be paid for the land purchase cost. After the loan is disbursed, the repayment of the loan for the land portion begins. As for the construction cost of the house, the loan disbursement will be made for the second time, such as at the timing of the construction contract, start of construction, or topping-out ceremony, and the third time at the time of completion, so the payment of the construction cost can be covered with a loan. Once the house is completed, regular housing loan repayment begins.
In the case of Land Advance Loans, it is common that interest-only repayment is made during the period between the purchase of the land and the completion of the house, and regular housing loan repayment of the principal and interest combined begins after the house is completed.
1. Process of Land Advance Loan
2. Advantages and Disadvantages of Land Advance Loan
Advantages of Land Advance Loan
・You can borrow at the same interest rate as that of a regular housing loan.
・ If certain requirements are met, loan for land purchase costs is also eligible for housing loan tax deduction.
Disadvantages of Land Advance Loan
・The process is time-consuming because setting up a mortgage on the land requires preparation of drawings of the house and construction cost estimates prior to the purchase of the land.
・Since there will be two loans, registration fees and other loan expenses will be incurred.
・Repayment begins with the loan disbursement for the land cost, so repayment is required over several months, even before moving in the home.
・The number of financial institutions that offer this service is limited.
3. Financial Institutions Handling Land Advance Loan
・Sumitomo Mitsui Banking Corporation
・SBI SHINSEI BANK (For Land Purchase Cost only)
・Mizuho Bank, Ltd. (Installment loan)
The details of the contract vary depending on the financial institution, so be sure to check in advance about the loan conditions and when repayment begins.
What is Bridge Loan?
A "Bridging Loan" is a loan that plays the role of a "bridge" by disbursing in advance the necessary expenses before a housing loan is executed. The purchase cost of the land, the start and interim payments before completion of the building are paid with the bridge loan, and once the building is completed and the housing loan is executed, the amount borrowed through the “Bridge Loan” is repaid in a lump sum with the housing loan, and the Bridge Loan is consolidated into the housing loan.
1. Process of Bridge Loan
2. Advantages and Disadvantages of Bridge Loan
Advantages and of Bridge Loan
・Preparation and procedures are not as complicated as those for Land Advance Loan, since taking out a mortgage is not required.
・Since interest-only repayments are made until the building is completed, it is easy to make a financial plan.
Disadvantages of Bridge Loan
・Since it is an unsecured loan, the interest rate tends to be set as high as about 2-4%.
・Since this is a separate contract from a housing loan, administrative fees and other costs will be charged.
・The longer it takes to complete the building, the longer the borrowing period and the more the interest burden.
・The number of financial institutions that offer this service is limited.
・It is not eligible for housing loan tax deduction.
3. Financial Institutions Handling Bridge Loan
・AEON Bank, Ltd. (For construction cost only)
When buying land and building a house on it, there are two steps of "buying land" and "building a house", which complicates financial planning. Only a limited number of financial institutions offer flexible housing loans for custom-built houses, and the contract details, loan conditions, number of loan disbursements, and timing of repayment vary depending on the financial institution. Since the above is a general description, please compare each financial institution in advance and choose the housing loan that best suits your needs.
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