Are you considering buying land in BC? Whether you’ve found a lot in or around Vancouver or Victoria, or if you’re buying up land in a more rural part of the province, if you plan on financing the purchase, there are some things you need to know about a land loan.
Required down payment on vacant land in BC
Let’s start with the way that the banks tend to view land loans. If you take out a mortgage on a home purchase, the banks realize that you have a vested interest in staying out of default, even if your finances get tight — because you don’t want to have to leave your home and have your property foreclosed in Canada. However, you’re not going to have that same connection to a vacant lot in most cases, so if you find your income dropping or have some other emergency expenses get in the way, you’re not going to be as averse to letting some land enter foreclosure. So you can expect a higher interest rate and a higher down payment requirement. That helps the banks justify the higher risk that is associated with lending for land without improvements.
The type of loan that finances your land purchase depends on what you want to do with the land. Some people buy land to hold onto for a future investment, while others buy land with the express purpose of putting up buildings fairly quickly after closing. Banks generally do not like land purchases that have speculative use. It’s important to make sure that the property is zoned for the use you have in mind, which means you need to take out a professional survey on the land.
Of all of the types of land loans out there, the hardest to take out can be ones for land that does not already have any improvements or infrastructure on it. Even if you’re buying land without any connection to utilities or any other sort of infrastructure, though, you still have to pay property taxes on that land — even while you’re not using it and it’s just sitting there.
How much down payment for land in BC
When you’re buying a house on land, you generally have to put at least 5 percent down (with a high-ratio loan), or 20 percent or more if you want a loan without mortgage insurance. When you’re taking out a land loan, expect to put between 25 and 50 percent down. The difference depends on the policies of the lender, the piece of land in question and the uses that you have in mind for the land.
Amansad Financial has land loan experts who can help you with individual questions about your own situation. However, here are some questions that you’ll need to find the answers to about the land in question before you start considering making an offer of your own:
- Do the local and provincial entities already provide services to the land, such as trash and recycling pickup, high speed Internet, a wired land telephone line, or mail delivery?
- Do such issues as soil contamination cause a problem for the use of the land?
- Is the city or province considering rezoning the land, or any part of it?
- Are there any restrictive covenants in place that would affect your ability to do what you want with the land?
- Does the land have a proven water source? If it does, how deep does it go into the ground?
- Is there already a system for removing wastewater from the property? If you needed to put in a septic system, could you?
- Is the title clear on the property? If not, is there a clear list of liens that are already in place?
- Do any easements exist on the property that would allow your potential neighbors, utilities and other entities onto any part of the land?
UNDERSTANDING LAND TRANSFER TAX IN BC
Each province in Canada has a registry of the owners of each parcel of property throughout that province’s boundaries. Any time the ownership of a parcel of property changes, there is an applicable property/land transfer tax. This kicks in when someone:
- takes over possession of a life estate, lease, or right to purchase for a particular property
- gains an additional registered interest in a particular property
- acquires a registered interest in a particular property
The dollar amount of the tax varies with the property’s fair market value, as well as the value of any improvements, such as buildings on the date when you register the title change (unless you are buying a pre-sold strata unit). An example of a pre-sold strata unit would be a condo unit that you buy well ahead of the building’s actual completion.
Here’s how the tax works:
On the first $200,000 or less: 1.0%
On the rest above $200,000: 2.0%
So if you purchase a property for $800,000, you would owe $14,000 in land transfer tax. That includes $2,000 (1.0% of the first $200,000) and $12,000 (2.0% of the remaining $600,000). For those who register a life estate on the property, the tax is based on their life expectancy. To figure out what the taxable value would be for a property under the life estate, you would multiply the fair market value of the property by the percentage that matches your life estate’s term.
What is fair market value?
The amount that a willing buyer would pay to a willing seller for a particular property (for both the land and the improvements) open an open market is considered fair market value. This is calculated for the day of the registration of the transfer.
What is an open market transfer?
If the transfer allows anyone who has a chance of being interested in buying the property to submit an offer, that transfer is deemed as an “open market” transaction. One of the most common examples of an open market transfer happens when a seller uses a realtor to list a property or advertises it for sale by owner.
When this happens, whatever the purchase price is generally counts as the fair market value, so long as the purchaser registers the property within a month or two of completing the purchase contract. If the purchaser takes significantly longer to register the transfer, then a separate appraisal may need to take place to ascertain fair market value. This is particularly common when the value of the property changes significantly, when the condition of the property undergoes considerable change, or if the buyer did not purchase the property on the open market.
What is a non-open market transfer?
Some property transfers take place under other circumstances than an open-market sale, such as a gift transfer or a bequest. In those cases, the tax authority uses an independent appraisal or the BC Assessment value, which generally reflects the fair market value from July 1 of the prior year. So BC Assessment’s value could be off, particularly if the transfer takes place in the spring of the next year. Other factors that can influence valuation include recent improvements, classification of the land as farmland, or a change in conditions in the surrounding market.
We have connections with industry professionals and lending sources throughout BC, and if we don’t already know the answer to your questions about a particular lot, we will help you find them.
If you have any questions about whether the piece of land that you are considering is a good investment for you — or whether the loan you are considering is right for you — contact Amansad Financial. We’ve helped many clients find the land loans they needed.