If you have a large block of land and you’re not making full use of it, you may feel that subdividing the land could be a great investment. There are a range of things you can do with a subdivision project – from a subdivide and build to create an investment property to selling off the extra lot.
But what if your property is still mortgaged? Can you legally split your land if you’re still paying off your home loan?
The answer is yes, you may be able to subdivide your lot even if you have a mortgage. But there are several conditions that need to be met: you’ll need to satisfy certain requirements from your bank, surveyor, and your local council.
In this article, we will cover the basics of subdividing with a mortgage, and share a few tips on how to do it successfully. Let’s get started!
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Can I Subdivide a Property With an Existing Mortgage?
Yes, you can still subdivide a property if you have an existing mortgage. However, you will need the bank or lender’s consent before you can move forward with the subdivision plan.
This is because when you sign a mortgage, the bank has a legally binding agreement with you that essentially states they keep the title of the land until you pay off the mortgage. Thus, the bank needs to approve any land dealings while the title is still with them.
This means the subdivision of mortgaged land is at the home loan provider’s discretion – they can either approve or deny the project. For a simple subdivision, this is generally not a bad thing for the lender. Any major changes to your property – such as subdivision or renovation – affect the value of the block and the security a lender holds. Subdividing a block of land adds value, and the bank typically wants to check if their debt position will be covered.
The issue that comes up more often is when you try to sell one of the split lots. As the current mortgage covers the whole property, you’ll need to work through this process with your bank or lender.
The bank will check your present financial situation and determine if they can then release the title of the subdivided lot – in other words, a ‘partial release of mortgage’ so you can sell the new lot.
When Do I Inform My Bank About a Subdivision?
If you have a current mortgage, your home loan provider will need to be involved early in the subdivision process. That’s because the bank is required to sign plans, titles, and documents before the deed registration at the Therefore, you need to notify the bank before the registration.
In Western Australia, Landgate is West Australia’s land information authority. The land transaction toolkit on their website contains the relevant information and resources for legally subdividing, such as land title policy and procedures, strata information, survey and plan guides, fees and forms, and more.
If the mortgagee’s signature is not present on the plans, administration sheets, and other documents, Landgate is likely to reject the subdivision plan. For that reason, there’s no way to avoid your lender getting involved in the subdivision before anything can move forwards.
After you have met all conditions and requirements, the land authority will sign their approval, followed by the bank. They will then issue you the subdivision certificate. The subdivision process in WA is quite complex, so it’s worth consulting an expert for guidance.
What Do I Need for My Bank to Approve a Subdivision?
Your lender can let you know which documents they require to consider a subdivision plan, as this may vary depending on your bank and individual circumstances.
Typically, documents you’ll need to present to your lender include:
- Plan of Subdivision Document signed by your local council.
- Application for New Titles
- Discharge/refinance authority form (as the property covered by the mortgage is fundamentally changing)
Other documents such as a Statement of Environmental Effect, completed Development Application, and others may be needed. These are typically also prepared for the local council, so they should be easy to provide at this stage. If you’re working with a subdivision planner and builder, they can help you navigate the paperwork required for your lender and your local council.
Note that your surveyor will do all the fieldwork and draw up the subdivision plan, giving the plan to you once it is finished. If your development plan meets all conditions set by your local council, you can then lodge the documents with them to get their signatures.
Once they affix their signatures, grant approval, and release the approved plans and documents, you can then present the documents to your bank. After each of these steps is complete, you can finally lodge your registration at the land information authority.
It is important to note that banks will only sign complete, original documents and plans that are fully signed and witnessed. Drafts of the plans will not be accepted, so you’ll want to discuss your subdivision plans with your lender much earlier. This is because the bank’s verdict will shape which subdivision options are available to you – read more on that below.
Can I Sell Subdivided Land With a Mortgage?
Since your property is still mortgaged, you cannot sell part of your land unless you get the lender’s consent first – in this case, the bank. Generally, you need to apply for a release of part security. You may need to fill out a few forms or pay an administration charge too.
Consent to sell often depends on the value of the remaining unsold property. The bank may require a professional valuation process, but if you still have enough equity to support your mortgage, they are likely to approve your request.
Assuming you have insufficient equity, your bank still might approve your plans. However, you may need to repay some of your mortgage from the proceeds you get from the sale.
If you’re unable to sell the lot after subdivision, an alternative is to build a ‘house behind a house’ on the new lot, also known as a rear strata or battleaxe block. To make the most of these unique lots, ensure you work with an experienced rear strata builder.
Do I Need to Refinance to Subdivide?
It may be necessary to refinance your existing mortgage to cover the costs associated with the subdivision. If you plan to subdivide and sell off part of your land, you’ll also need to work out a plan with your lender, as your current mortgage will cover the entire property.
The simplest reason to refinance is so you’ll have sufficient funds for the demolition of an existing house on the land and/or construction costs, like if you’re creating a townhouse development. You also need to factor in other costs such as the drainage systems, landscaping, retaining wall construction, engineering fees, council rates, and more.
A simple backyard subdivision can cost as much as $40,000, so refinancing is often a way to fund subdivision costs, particularly when planning to subdivide and build a new home on the lot.
You may be required to refinance your home loan to subdivide and sell the lot since your mortgage agreement would include the entire property – including the lot you plan to sell. This process will require having the home and land reappraised, and ensuring both you and your lender are happy for the sale to go ahead.
Refinancing will allow you to change the details of your mortgage to only include the remaining lot. Your mortgage provider can give you more information on what your options are, and the rates you can access if you refinance your property.
Subdivision Alternatives for Land With a Mortgage
Sometimes the subdivision of a lot isn’t the best option, or you may not have enough land to subdivide. So what are your choices?
- Build a granny flat. A granny flat is an additional space on your property that you can rent out to relatives or other tenants. You don’t need to subdivide to build a granny flat, but you’ll still need planning permission.
- Make an appeal to the planning commission. If you can’t meet the minimum lot size for subdivision, you can appeal the decision to be granted up to 5% variation. However, approval is not guaranteed, and the appeal process takes time.
- Acquire adjacent properties. You can buy and acquire adjacent properties and incorporate them into your lot for subdivision for building or survey strata developments. Note that this method cannot be used to split the land into single green-titled lots.
How Do I Know if My Subdivided Land Will Sell?
There are many factors that help you determine whether the subdivided land will sell. Here a few questions to ask:
- Is the location accessible and in-demand?
- Are utilities connected to the lot?
- Is the subdivided land big enough to build on?
- Are there nearby conveniences?
Your subdivision specialist can advise you on whether it’s better to sell the subdivided lot or to build an investment property instead.
What Is a Subdivision Loan?
If you require funds to cover the cost of subdividing land, you can apply for a subdivision loan. A subdivision loan can typically be used for the following:
- Subdividing a land, including all attached fees and charges
- Constructing a structure or feature required for the approval of your subdivision application
- Demolish a pre-existing house on the property
- Paying for your surveyor’s service
- Construction of a home or homes on the subdivided lots
Considering if Subdivision is Right for You?
If you’re considering a subdivision in the Perth region, Central Avenue Homes are the subdivide-and-build experts who can offer you sound advice. From design to handover, you’ll benefit from our decades of experience on WA subdivision projects.
This article is published in good faith and for general informational purposes only. It does not take into consideration your individual circumstances and does not constitute an estimate for any specific project. Central Avenue Homes does not make any warranties about the ongoing completeness, reliability and accuracy of this information. Construction costs and other financial details vary and you should always seek a specific quote.
Greg has over 40 years of experience in the WA building industry starting as a carpenter joiner.
He is entrenched in the local industry and has served on the board for MBAWA (Master Builders Australia WA) for over 10 years and was a founding director of Wesbuilders Cooperative for over 11 years.
With this experience he is able to quote accurately on new projects without the huge increase to provisional sum allowances.