A Guide to Farm Mortgage Loans in Canada
Are you dreaming of purchasing a commercial farm, a lifestyle farm, a farmhouse, or another type of rural business? Or, perhaps you already own a farm and need additional financing to invest in improvements or manage other financial needs of your business. Whatever the case, a farm mortgage loan in Canada will provide you with the necessary funds for agricultural purposes. Let’s take a closer look at farm financing options available to Canadians.
Table of Contents
Understanding Farm Mortgage Loans
A farm mortgage, also known as an agricultural loan, is a type of long-term financing that allows one to either purchase a farm property or release equity from it. While quite different from residential mortgages, farm loans are similar to traditional commercial mortgages, except they are tailored specifically for the agricultural industry.
Types of Farm Mortgage Loans
There are several types of farm mortgage loans available in Canada:
Conventional Farm Mortgage Loans
A conventional farm mortgage loan involves purchasing or refinancing a piece of land that will be used for farming or agricultural pursuits. When taking out a farm mortgage, you will be asked to put in a relatively large down payment of at least 25% of the total property value.
Conventional farm mortgage loans are typically paid back over 1 to 25 years and may be “capital plus interest” or “interest-only” loans.
Government-Backed Farm Loans
The Government of Canada offers a government-backed loan program intended to help Canadian farmers finance the purchase or improvements of agricultural land and related products. Farm mortgages backed by Canadian Agricultural Loans Act (CALA) present less risk to the lender, – as such, they are offered by many lenders and often enable applicants to qualify for higher loan amounts.
When applying for a farm mortgage under the CALA, you may be able to obtain up to 90% LTV, with a maximum loan amount of $500,000.
Short-Term vs. Long-Term Loans
Agricultural loans in Canada are offered for both short-term and long-term durations. Depending on your specific goals and financing purpose, you may apply for either.
- Short-term agricultural loans: Short-term farming loans are often used to finance operating expenses, with amortization periods being aligned with agricultural production cycles of anywhere between 3 and 18 months.
- Long-term agricultural loans: Longer-term farm mortgages, on the other hand, are typically obtained to purchase or develop land and structures or finance large assets like machinery and livestock. Long-term agricultural loans have amortization periods of longer than 18 months.
Lines of Credit for Farms
Farm lines of credit are designed to help farmers cover short-term expenses and manage their immediate cash flow. Unlike traditional farm mortgages, lines of credit give farmers the flexibility to borrow money as needed, up to a pre-approved limit. As such, borrowers can easily withdraw funds, repay them, and borrow again as long as they stay within the line of credit limit.
Eligibility Requirements
The requirements and eligibility for farm loans are similar to a conventional mortgage, with a few minor differences.
- Down payment: While you may be able to put down only 5% on your residential property, a farm mortgage requires a much larger downpayment of at least 25% of the purchase price.
- Credit score: Like with any other type of loan, good credit is a must for farm mortgage approval. As such, most lenders will require the applicant to have a credit score of at least 660, with higher credit scores often associated with better mortgage rates and terms. That being said, lower credit-score applicants may still be able to obtain an agricultural loan through alternative lenders.
- Overall financial situation: Finally, the lender will assess your overall financial situation, including your regular income, your farm’s cash flow, and other debt payments you are responsible for. At the end of the day, it is the lender’s job to make sure that you will be able to repay your farm mortgage without any issues.
Application Process for Farm Mortgages
When looking for agricultural financing, expect to undergo the following farm mortgage application process:
- Find an experienced mortgage broker specializing in farm mortgage loans. Set up a meeting to discuss your mortgage needs and financial situation.
- Collect the necessary documentation and share it with your mortgage broker or agent.
- The mortgage agent will review the documents, assess your credit, and provide you with a mortgage pre-approval.
- The agent will also research the lenders and present you with the optimal options.
- Once you have chosen the right lender, your mortgage agent will complete the application on your behalf, coordinating and overseeing the lender evaluation and appraisal.
- Finally, once your application is approved, your agent will facilitate the final signatures and funds disbursement.
Benefits of Farm Mortgage Loans
Agricultural loans in Canada offer plentiful benefits to local farmers:
- Financial flexibility and growth opportunities: The funds obtained through an agricultural loan can be used for a variety of purposes related to purchasing or developing farmland and assets associated with it. They provide farmers with valuable opportunities to invest in their agricultural operations and expand their farming businesses.
- Potential tax benefits: The interest paid on an agricultural loan may be tax-deductible, thus reducing one’s taxable income and overall tax liability at the end of the year.
- Investment in agricultural infrastructure: Farm mortgage loans provide access to a significant amount of capital, allowing farmers to invest in necessary agricultural infrastructure. Plus, the repayment can be spread out over time, making it easier to manage cash flow effectively.
Challenges of Obtaining Farm Mortgage Loans
Just like any other type of commercial mortgage, farm loans can be difficult to obtain due to high upfront costs, dependence on the economic situation, and intricate rules and regulations.
- High costs and interest rates: It isn’t uncommon for farm mortgages to include high upfront costs and relatively high interest rates, which can significantly strain a farm’s budget.
- Market volatility: The farming business does not come with the most stable of incomes, with fluctuating commodity prices and market volatility having a potential impact on loan terms and conditions.
- Complex regulations: Finally, agricultural mortgages are associated with complex regulations, including environmental restrictions and zoning laws. These can extend and complicate the loan application and approval process.
Obtaining a Farm Mortgage Does Not Need to Be Difficult
While the process and challenges associated with farm financing may seem overwhelming, working with a skilled and experienced mortgage broker can make the process smooth and problem-free. Contact Chris Allard’s team today to learn more about agricultural loans in Canada.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.