Can You Buy Land First and Add a Building Contract Later Under the 5% Deposit Scheme?

Find out whether you can settle vacant land first and provide a building contract later under the Australian Government 5% Deposit Scheme

The Australian Government 5% Deposit Scheme can support some land-and-construction purchases, including certain transactions where the land loan settles before the building contract is finalised.

The timing and loan structure are critical.

There is an important difference between:

1. obtaining a Scheme-backed loan to purchase the land and adding an eligible construction loan shortly afterwards; and
2. buying or already owning land outside the Scheme, then applying for a Scheme-backed construction loan later.

The first structure may be permitted. The second generally is not.

What do the Scheme rules allow?

The current Scheme Information Guide allows an eligible buyer to purchase vacant land and build a home using either:

• one combined land-and-construction loan; or
• a land loan followed by a separate construction loan.

Where the second structure is used, the eligible building contract generally needs to be entered into within six months of settlement of the land loan.

The guide also makes clear that not every participating lender offers the separate land-loan-then-construction-loan option.

This means the Scheme rules may permit a structure that a particular participating lender does not offer.

Can you settle the land and apply for the Scheme afterwards?

Generally, the Scheme arrangement needs to be established before the land purchase settles.

A buyer cannot ordinarily settle vacant land using a standard loan or cash purchase, become the owner of the land and then apply for a new Scheme guarantee covering only the subsequent construction loan.

The Scheme guide distinguishes an approved two-stage transaction from a borrower who already owns vacant land before securing a Scheme place.

The safer sequence is:

1. apply for a Scheme place through a participating lender;
2. obtain approval for the proposed land purchase structure;
3. settle the Scheme-backed land loan;
4. enter an eligible fixed-price building contract within the required period; and
5. complete the construction loan application with the same participating lender.

The lender should confirm the complete structure in writing before the buyer signs an unconditional land contract.

Why do some lenders require the building contract upfront?

Participating lenders apply their own credit and construction policies in addition to the government’s Scheme rules.

The lender needs to understand the completed project, including:

• the total land and construction cost;
• whether the project is within the applicable property price cap;
• the expected completed value;
• the borrower’s total contribution;
• the proposed loan amount;
• whether the borrower can service the completed debt;
• whether the building contract is acceptable; and
• whether there is enough money to cover variations and other costs.

Some lenders are therefore only comfortable approving the land and construction together.

Within the lender policies reviewed:

• ANZ requires the land and construction components to be submitted as one proposal, with both contracts signed before approval;
• Westpac and St.George provide for combined land-and-construction transactions, subject to their construction and Scheme requirements; and
• Gateway’s Scheme policy is limited to established properties, so it does not provide a construction pathway under that policy.

Other participating lenders may permit construction but still require the building contract before land settlement.

What are the construction time limits?

Under the current Scheme guide, the usual requirements for an eligible land-and-build transaction include:

• entering the building contract within six months of land settlement;
• commencing construction within 12 months of land settlement;
• completing construction within 36 months; and
• moving into the home within six months after the occupancy certificate is issued.

The construction must generally be undertaken by a licensed or registered builder under an arm’s-length, fixed-price building contract. Appropriate building insurance must also be in place.

The participating lender may impose shorter approval periods or additional conditions.

What happens if the land is untitled?

Untitled land can create another timing issue.

The Scheme guide provides that, where a guarantee pre-approval is issued for untitled land, the land generally needs to become titled within the applicable pre-approval period. The current guide refers to a 90-day period.

Long registration delays can therefore create a risk that the pre-approval or Scheme place expires before the land is ready to settle.

Buyers considering an off-the-plan land release should establish:

• the expected title date;
• whether extensions are available;
• whether the lender will reassess the application;
• whether updated income documents will be required;
• whether the property price cap could become an issue; and
• what happens to the contract if Scheme approval is not available.

Does the price cap apply to the land or the completed project?

For a land-and-construction transaction, the relevant amount is generally the combined cost of the land and the build.

A buyer cannot avoid the property price cap by separating the land contract and building contract.

The lender may also include certain construction-related costs when assessing whether the transaction remains within the cap. Buyers should have the participating lender confirm which amounts are included before committing to the contracts.

Example: land now, building contract in four months

A first home buyer wants to purchase registered land for $300,000. They expect to select a builder and sign a $350,000 fixed-price construction contract four months after land settlement.

The combined project cost is $650,000.

The transaction may fit within the government’s two-stage framework where:

• the buyer secures a Scheme place before purchasing the land;
• the participating lender offers the separate land and build structure;
• the total project is within the applicable price cap;
• the building contract is signed within six months;
• the project satisfies the construction requirements; and
• the borrower continues to meet the lender’s credit policy when the construction loan is assessed.

It would be materially different if the buyer settled the land first without a Scheme arrangement and approached a participating lender four months later seeking a guarantee for the construction loan alone.

Questions to ask before signing the land contract

Buyers considering this structure should obtain clear answers to the following:

• Does the lender offer the separate land-loan-then-construction-loan option under the Scheme?
• Must a builder or building contract be identified before land settlement?
• Is the Scheme place reserved when the land loan is approved?
• What is the deadline for providing the signed building contract?
• Will servicing be assessed again when the construction loan is submitted?
• How will site costs, upgrades and variations be treated?
• What happens if the final building price is higher than expected?
• What happens if the buyer cannot sign a building contract within six months?
• Will the land contract protect the buyer if finance or Scheme approval is unavailable?

The main point

The Australian Government 5% Deposit Scheme permits an eligible structure in which the Scheme-backed land loan settles first and the building contract is signed within six months.

That does not mean every participating lender offers it.

The buyer needs to secure the Scheme arrangement before settling the land and use a lender that supports the two-stage structure. Buying land first and attempting to apply for the Scheme afterwards can leave the buyer ineligible for a construction-only guarantee.