Navigating farm mortgages

Navigating farm mortgages
Jan 08, 2019

An ag lending expert reviews how farmers can select the best mortgage options for their businesses

By Kate Ayers
Staff Writer

Generally, farm families require mortgages to acquire or expand their operations. Eric Taylor, a senior relationship manager at Farm Credit Canada (FCC), provides producers with tips on factors to consider when applying for farm mortgages and what questions to ask their lenders.

To be eligible for a farm mortgage with FCC, the application must meet two main requirements. The applicant must be capable of generating at least $5,000 of agricultural income annually and the asset being purchased must be ag related, Taylor said.

Individuals may have more difficulty acquiring farm mortgages as opposed to regular acreage mortgages (generally those for under 10 acres) because the lender is taking on higher risk with people who want to begin or expand their farm business, the Loans Canada website said. As a result, farmers often need a down payment of at least 25 per cent.

Some financial institutions, however, may offer loans or programs that could provide flexibility from the standard mortgage requirements. So, producers should ask their lenders if the institutions offer any special loan products that could be relevant for their farm operations. 

“At FCC, … we have many different loan products that could suit farmers’ needs,” Taylor said. For example, the company offers a Young Farmer Loan for producers under 40 and a Transition Loan to help farmers smoothly transfer farm assets to the next generation.

Once producers complete these steps and receive mortgage approvals, they can work with their lenders to finalize the details.

The first factor to consider is the mortgage term and farmers have four options: open, closed, variable- and fixed-rate. “Open versus closed terms refers to the prepayment privileges of a mortgage. With an open term, the loan can be prepaid partially or fully at any time without any penalties. With a closed term, all prepayments would be subject to a penalty,” Taylor explained.

For “variable-rate mortgages, the interest rate is based off the prime rate, which is subject to change at any time. It generally follows the Bank of Canada overnight rate,” Taylor added.

On the other hand, the interest rate for “a fixed-rate mortgage … is locked in for a predetermined period.”

Generally, “the longer the length of the term that you lock in for, the higher your interest rate will be.”

Farmers should also discuss their business plans with their lenders when selecting their mortgages.

This information helps lenders build the most effective package for the farmer’s unique circumstances, Taylor said. For example, if a farmer buys a piece of land and plans to sever and sell the house in a few years, an informed lender can set up the mortgage to allow for a repayment of a portion of the loan at that time.

Farmers should consider purchasing loan insurance as well. This insurance ensures they have coverage in the event of accidents or deaths, and this tool helps to protect farm assets, Taylor said.

Finally, producers should also consider if they need to apply for new or extended operating credit to plant crops on the new farm or stock the barns, he added.

Maksymowicz/iStock/Getty Images Plus photo

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