The ins and outs of farm mortgages

Your lender should be a key partner as you make financial decisions for your operation

Whether you’re just starting your farm or adding to your operation, you should know the ins and outs of your farm mortgage options. A lender is a great resource to use to learn more information.

Farm “lenders want to be (the farmer’s) partner in his or her business. We make better recommendations if we have full disclosure on what he or she has and what the needs of the business are,” said Brian Wagler. He is a senior manager of mobile lending at Kindred Credit Union in Ontario.

Lenders can help farmers weigh their financial options. When considering the purchase of more land, you want to understand your balance sheet, said Wagler.

“You want to know what kind of income you have to service the debt and that your income will support the debt you're going to take on,” he told Farms.com. “You have to be able to pay that loan back within 25 years.”

You also need to decide on your interest rate term. By locking in an interest rate over a longer period, you can protect yourself from interest rate spikes but this decision can also cause you to miss out on lower rates, said Wagler.

While interest rates are currently relatively low, between 3 and 4 per cent, they can increase again, said Wagler.

“Prudent lenders and prudent farmers will take (interest rates) into consideration and say ‘Okay, today I can borrow for this, say it's 3.5 per cent.’ But they have to look at what-if situations and know what happens if rates increase to 4 or 5 per cent. What's their backup plan? How can (producers) afford to make those payments if that increase takes place?” he said.

Farmers also often have the option of a 20 per cent prepayment feature.

“If you've locked in your mortgage for five years, each year you (may) have the option to prepay 20 per cent of the remaining balance on your mortgage and you can pay that ahead with no penalty. That (prepayment) will make a big difference down the road; the quicker you get that loan paid back, the less interest you'll pay,” said Wagler.

In some cases, this prepayment option can change to 10 per cent and you’ll get a lower interest rate in exchange for the lower prepay.

“A farmer might think he or she isn't going to have a lump sum of cash to make an extra payment, but he or she would rather have a lower monthly payment or, rather, have less interest cost over the long run,” said Wagler.

If you need advice or are considering the purchase of more land, you should work with your lender, said Wagler.

“Keep a good working relationship with your lender – especially when times are going well, but also when times are going poorly. There are things we can do to help,” he said. “Lenders want to be partners and do everything they can to help.”

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