Generally, a bank will not grant a mortgage loan for the purchase of land. However, for those who wish to acquire land and build their home on it, with an architectural project approved by the City Council and the corresponding municipal license, financing options do exist.
The main one is the self-build mortgage, let’s look at its main characteristics:
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- Unlike conventional mortgages, where the bank provides the funds in a single payment, a self-build mortgage is disbursed in phases as construction progresses. A contract with the construction company detailing the costs and timelines will be required (the bank will review the budget to ensure it is realistic before granting financing)
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- Banks generally finance up to 80% of the appraised value of the completed home, but for the acquisition of the land they usually offer no more than 50-60% of its value
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- The bank makes capital disbursements as it verifies the progress of construction through certifications submitted by the technical architect
Notwithstanding the above, it is most common for a bank to only grant a self-build mortgage when the borrower already owns a plot of land. In this case, there are several options for financing the purchase of land:
A) TO REQUEST A PERSONAL LOAN
It can be a good option for financing the land purchase, but the associated interest rates are usually higher than those of a mortgage. Once the land is acquired, the next step would be to apply for a self-build mortgage to construct the house
B) TO REQUEST A MORTGAGE TO PURCHASE THE LAND
Some banks grant specific mortgages for the purchase of building urban land, but this is rare and in any case, only a portion of its value is financed (50-60%)
C) TO MORTGAGE ANOTHER PROPERTY TO PURCHASE THE LAND
Another riskier option is to mortgage another property – such as the borrower’s home – to finance the purchase of the land
What if I want to install a prefabricated house?
Let’s now look at the relevant aspects to consider when the borrower’s intention is to obtain a mortgage to install a prefabricated house on land that they already own:
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- If the prefabricated house is considered “real estate”, a conventional mortgage can be requested (if the house is installed on urban land and registered in the Property Registry, it will be easier to obtain financing)
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- However, if the prefabricated house is considered “movable property”, a personal loan will be required.
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- The amount financed (the percentage of the total value of the completed house that the loan represents) will depend on the type of house and whether it is located on developable land.
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- It does not necessarily imply construction in phases (since the house can be delivered in a much shorter period of time)
