can i subdivide land with a mortgage

Have you wondered if it’s possible to subdivide land with a mortgage? It’s a decent question, and the answer isn’t always straightforward.

Unless they’re retired or wealthy, most people who own property tend to have a mortgage. A home loan is a way to own real estate, and it usually takes a couple of decades to pay off. 

But what if you’re interested in property development and have considered subdividing the land that is mortgaged? 

It can be a complex process but don’t worry because we’re here to share eleven valuable pieces of information related to this question. 

We’ll explore in detail everything you need to know about subdividing land while having a mortgage. By the end of this article, you’ll be an expert. 

So, let’s get into it in detail. 

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What is a Mortgage? 

Let’s begin with an explanation of what a mortgage is. 

Most people know that a mortgage is a home loan, and that’s not quite right. 

A home loan is an amount of money loaned to you by a financial institution so you can purchase property.  

However, the mortgage is a legally binding agreement that the bank can claim ownership of your property if you default, or foreclose, on payments.  

In the case that you can’t make your home loan repayments, the bank will seize ownership of your home and sell it to recoup the losses they incurred from you not paying off the home loan in full.

While this sounds scary, it’s not something to worry about as long as you keep steady work and make repayments on time.  

Why would I want to subdivide, you ask? That’s a great question, so let’s spend some time answering it. 

Why Subdivide?

why subdivide

There are a number of reasons why you may want to subdivide your property.

A subdivision is when a piece of land is split into two or more separate titled lots. In most cases, this is done so you can build separate dwellings on the original piece of land.

Many people subdivide to maximise the value of their land. 

For instance, if they sold the house and land as is, they might see a sale price of $900, 000 for instance.

Yet if they subdivide and build two townhouses on the subdivided land, they could sell each of these for $800,000. Double that, and you have 1.6 million. 

Of course, there are costs associated with property development. However, even with the costs, a decent amount of profit is available for people who do this.

Another reason why people subdivide is to downsize and use the other home for an investment property to bring in passive rental income.

Another reason still is that people want to live close to family, so they live in one property and move their parents, or their kids, or other family members into the other property.

As you can see, there are a few reasons why you may want to subdivide your land. 

So, what happens when you have a mortgage and want to subdivide the mortgaged land? Let’s take a look.

What do Banks Want? 

Banks are businesses, first and foremost. Their business is money – lending it to make even more. 

As we discussed above, a mortgage on your land means the bank has the potential to own that land if you fail your obligations to pay back their money.

This means that the bank needs to approve a subdivision. 

why subdivide

Debt Position and Land Value

The bank looks to see if their “debt position” – or the money they lent you, is still covered. 

The good news is that a subdivision, in most cases, increases the value of the land. So, in most cases, the bank won’t take issue with a subdivision. 

The bank will also look at your financial position when you come to selling the separate titled lots. They want to know that you can still make repayments on the original loan. 

As you are likely looking at a significant profit from the subdivision process, this shows the bank that you can still service the loan. 

So, is it Possible?

So, in short, the answer is that yes, you can subdivide land with a mortgage. 

However, there are some other pieces of information to share so that you’re fully informed of all the necessary facts.

how to subdivide with mortgage

Navigating Subdivision Regulations 

Subdividing land is a complicated process. There are many moving pieces, and a mistake can cause delays, ultimately costing you money. 

The first step is to check where you want to subdivide in the local council/local government area. If this is your home, you’ll know the council. 

Check with them that your property qualifies for subdivision and that it is zoned for the type of dwelling you want to build – are you thinking a duplex build?

For instance, some people buy homes that are in industrial zones, often because they’re cheaper than a residentially zoned area. 

However, you cannot subdivide a home in an industrial zone to build residential buildings in most cases. 

So, the council’s zoning and planning regulations will determine if you can subdivide. The council may conduct land surveys to determine this, and you’ll need your surveys if you can go ahead.  Is the Lot Suitable?

Not all lots are suitable for subdivisions. Some councils will have rules about a minimum lot size and frontage (the width of the lot at the front) for subdivision. 

The final lot size of the new properties also needs to be within regulations.

Can you begin to see there’s quite a process here?

subdivide with mortgage

Other Factors to Consider

Other factors come into play as well. For instance, a lot on a gradient (slope/hill) is trickier to subdivide when compared to a flat lot. This is due to the difficulty of laying a level foundation on a slope. It costs more.  

Corner lots are typically the cream of the crop in most cases. Consider yourself lucky if you have a corner lot that’s suitable for subdivision.

You May Need to Refinance

sources of finance banks

sources of finance real estate development mainstream

If you have an existing home loan, you may need to refinance it to fund your subdivision project.

A residential property development has many associated costs. For instance, you’ll need to pay for the demolition of the existing home, as well as the building process of the new houses.

If you have equity in your home, you may be able to access this to fund some of the costs.

In addition to accessing your equity, you may be able to refinance for a larger loan to fund the subdivision project.  

Here are some of the costs associated with property development:

  • Drainage, sewerage and water connections
  • Landscaping/retaining walls
  • Driveway paving and installation
  • Planning fees
  • Engineering fees
  • Construction costs
  • Utility connection fees
  • Conveyancing fees
  • Sales agent commission (for selling the properties, if you decide to) 
  • Relocating power poles (if required)

It’s worth noting that a bank will not pay for all the associated property development costs. In most cases, they will fund the construction of the project, with funding released in stages according to the progress of the building works. 

So, you’ll need some ready cash to pay for surveys, conveyancing, planning fees, designs, drafts, and other costs that aren’t construction related. These are called soft fees.

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Contingency Funds

Banks also want to see evidence of contingency funds. This is money tucked away for expenses that may pop up during a development project.  

A contingency is a buffer to cover unexpected costs. And believe us, anything can happen during a subdivision development. 

For instance, if you enter into a dispute with the builder, you may have to engage a solicitor to represent you or to support a meditation meeting. We all know lawyers aren’t cheap. 

Another example of something contingency funds can pay for is a mistake in designs, or the town planning process. If you need to go back and obtain a design amendment or pay town planning fees again, you need that money tucked away. 

The bank will want proof of contingency funds, as cold hard cash in your account. 

Other Things to be Aware of When Subdividing 

There are other factors to be aware of when considering a subdivision with a mortgage. 

Capital Gains Tax 

capital gains tax on property development

One thing to consider is capital gains tax or CGT. This is tax that you pay to the government when selling a capital asset such as real estate.  

If you retain ownership, you won’t have to pay this. 

However, if you sell the properties, you must pay CGT. It pays to look at this cost as a development cost or a silent partner. For instance, you get your cut at the end of a project, and the taxman gets his cut too. The good thing about paying tax is that it is a sign that you are making money, which is the endgame, after all. 

Loan Costs 

Remember how banks are in the business of making money? One way they do this is to tack costs onto loans.

If you refinance to develop, you’ll need to factor in bank fees to your planning. 

For example, there are application fees, ongoing monthly or annual fees, and don’t forget interest. Interest is the main money-maker for banks when it comes to real estate loans.  

Development Valuation is a Different Game

When a bank values an existing property, it is a process that is based on the current market and comparable sales. 

However, this is not the way that property development valuation for loans occurs. 

The lender will examine your financial position with laser precision and will look for irregularities or gaps in your feasibility documents.

They will look closely for missed expenses or any red flags. Then, the valuation is based on expected profit margins after expenses.

In most cases, a bank wants to see that your project will meet or exceed a 15 per cent profit. This is why they will go over your finances and plans with a fine-tooth comb. 

Avoid Common Mistakes

Our final tip is a big one, and that’s to avoid common mistakes that beginner property developers often make.

One massive one is that the feasibility plan/analysis is not thorough enough and does not include all the expenses associated with the project. This includes things such as taxation liabilities, such as GST and CGT, as well as holding costs and other costs. 

 Remember, the lender looks at this with eagle eyes, so you need everything to be airtight. 


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In this helpful blog article, we’ve shared eleven valuable pieces of information that have helped you learn about subdividing land with a mortgage. We have even shared to the costs to subdivide your land.

We’ve shared how doing this is possible, as well as some handy tips about development finance and the subdivision process. By now, you’re armed with the knowledge to approach your own subdivision process with confidence and power. 

If you need a project manager or project consultant don’t hesitate to reach out to our expert team here at Little Fish we would love to hear from you.