Why raw land is priced differently
Lenders treat undeveloped land as riskier than a house. There is no building to repossess and resell quickly, so rates run higher, deposits are larger and terms are shorter than on a residential mortgage.
The default scenario reflects that: nine percent over fifteen years, rather than the six percent over thirty a house might attract. The gap is the risk premium, and it is expensive.
The formula behind the number
An amortising loan is repaid in equal instalments. Each one covers the interest that accrued since the last payment, and whatever is left reduces the balance. The instalment that brings the balance to exactly zero on the final payment is:
Here P is the amount borrowed, i is the monthly rate (the annual rate divided by 12) and n is the number of payments. Nothing else enters the calculation, which is why two lenders quoting the same three inputs must arrive at the same instalment.
Worked example: $100,000 at 9% over 15 years
The calculator opens on this scenario, so you can follow every step:
- Amount borrowed: $100,000
- Annual rate: 9%, so the monthly rate is 9 ÷ 12 = 0.7500%
- Term: 15 years, so n = 15 × 12 = 180 payments
Paying $1,014.27 every month for 180 months comes to $182,568. Subtract the $100,000 you actually borrowed and the cost of the credit is $82,568, or 83% of the sum borrowed.
Where each payment goes
The instalment never changes, but its composition does. The first payment carries $750.00 of interest and only $264.27 of principal. By payment 90 the split has moved to $500.40 interest against $513.87 principal.
| Payment | Instalment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $1,014.27 | $750.00 | $264.27 | $99,736 |
| 2 | $1,014.27 | $748.02 | $266.25 | $99,469 |
| 3 | $1,014.27 | $746.02 | $268.25 | $99,201 |
| 90 | $1,014.27 | $500.40 | $513.87 | $66,206 |
| 180 | $1,014.27 | $7.55 | $1,006.72 | $0.00 |
Because the term is shorter than a mortgage, principal repayment starts meaningfully sooner. That is one advantage of the structure.
What moves the answer most
Two levers change the total, and they do not pull with equal force.
Add one percentage point to the rate and the instalment goes from $1,014.27 to $1,074.61, which is $10,861 more over the full term. Cut 5 years off the term instead and the instalment rises to $1,266.76, but total interest falls from $82,568 to $52,011. If you intend to build, a construction loan that converts to a mortgage usually prices better than a land loan carried to term.
What this calculator leaves out
Survey, perc testing, zoning searches, access rights and utility connections are all excluded, and any of them can cost more than a year of payments.
Related calculators
- Home loan calculator — what the rate looks like once a house stands on it
- Down payment calculator — land deposits are typically far larger
- Price per unit area — for comparing parcels