Farm Mortgages in Canada 101: What You Need to Know About Financing Your Farm

Owning and operating a farm in Canada is an expensive endeavor that often requires taking out sizable loans and mortgages. With farmland prices continuing to rise and interest rates on the uptick, farmers across the country are finding it increasingly difficult to secure affordable financing. Though daunting, navigating the complexities of farm mortgages is a crucial skill for Canadian farmers looking to purchase land or make investments in their operations.

This guide will explore the current landscape for agricultural lending in Canada. It will examine interest rates, loan terms, and qualification requirements while also providing tips for getting the most competitive rates and favorable repayment options. With careful planning and research, Canadian farmers can find mortgages that fit their budget and set their farms up for long-term success.

Key Takeaways

  • Farm mortgages are a type of loan that allows farmers to purchase or refinance farmland, buildings, or equipment.
  • There are several types of farm mortgages available, including fixed-rate mortgages, variable-rate mortgages, and open mortgages.
  • It’s important to understand the options available to you and consider your financial situation and goals when choosing a mortgage.

1. Understanding Farm Mortgages

If you’re planning to buy a farm in Canada, you’re probably going to need a farm mortgage. A farm mortgage is a type of loan that is specifically designed for farmers and ranchers to purchase land, buildings, and equipment for their agricultural business. Here’s what you need to know about farm mortgages.

Eligibility

Every lender has their own eligibility requirements but generally, you must be a Canadian citizen or permanent resident, and you must have a good credit history. You’ll also need to provide a detailed business plan that outlines your farming operation and projected income. Lenders will want to see that you have a solid plan for how you’re going to use the land and generate income from your farm.

Down Payment

Most lenders require a down payment of at least 20% for a farm mortgage. However, some lenders may require a higher down payment depending on the size of the loan and the value of the property. As the national average growth rate in farmland values for the first six months of 2023 stands at 7.7%, it’s important to have a significant amount of cash on hand to cover the down payment and other associated costs, such as legal fees and property appraisals.

Interest Rates

Interest rates for farm mortgages can vary depending on the lender, the size of the loan, and the current economic climate. Some lenders offer fixed-rate mortgages, which means that the interest rate stays the same for the entire length of the loan. Other lenders offer variable-rate mortgages, which means that the interest rate can fluctuate over time.

Repayment Terms

Farm mortgages typically have longer repayment terms than traditional mortgages. The repayment term for a farm mortgage can range from 10 to 30 years, depending on the lender and the size of the loan. It’s important to choose a repayment term that works for your budget and your farming operation.

2. Types of Farm Mortgages

If you’re planning to buy a farm in Canada, there are several types of farm mortgages available to you. Here are some of the most common ones:

Fixed-rate mortgages

A fixed-rate mortgage is a type of mortgage where the interest rate remains the same for the entire term of the loan. This means your mortgage payments will remain the same throughout the life of the loan, making it easier to budget and plan for the future. Fixed-rate mortgages are a popular choice for farmers who want to lock in a low interest rate and avoid the risk of rising interest rates in the future.

Variable-rate mortgages

A variable-rate mortgage is a type of mortgage where the interest rate can change over time. This means your mortgage payments may increase or decrease depending on changes in the market. Variable-rate mortgages are a popular choice for farmers who are comfortable with taking on a bit more risk in exchange for the potential of lower interest rates.

Read more: Variable vs fixed/open vs closed mortgages

Government-backed farm mortgages

The Canadian government offers several programs to help farmers finance their farms. The Canadian Agricultural Loans Act program is a loan guarantee program designed to increase the availability of loans to farmers and agricultural cooperatives. The program provides farmers with access to loans at competitive interest rates and flexible repayment terms.

Private farm mortgages

Private farm mortgages are loans provided by private lenders, such as banks, credit unions, or private investors. These loans are not backed by the government and may have higher interest rates and stricter repayment terms than government-backed loans. However, private farm mortgages may be a good option for farmers who don’t qualify for government-backed loans or who need to borrow more money than the government programs allow.

3. The Process of Farm Mortgages in Canada

Here’s what you need to know about the process of getting a farm mortgage in Canada.

Gather Information

Before you start looking for a lender, you should gather information about the type of farm you want to purchase, the size of the land, and the type of farming you plan to do. This information will help you determine how much money you need to borrow and what type of mortgage will work best for you. Here’s a comprehensive guide on starting a farm business by the Government of BC.

Find a Lender

Once you have all the necessary information, you can start looking for a lender. You can approach banks (such as Scotiabank, CIBC, or RCB), credit unions, and other financial institutions that offer farm mortgages. You can also work with a mortgage broker who can help you find the best lender for your needs.

Apply for the Mortgage

Once you have found a lender, you will need to apply for the mortgage. The lender will ask for information about your income, assets, and liabilities. They will also want to know about the farm you plan to purchase, including its size, location, and value.

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    Get an Appraisal

    Before the lender approves the mortgage, they will want to know the value of the farm. They will require an appraisal to determine the value of the land and any buildings on it. The appraisal will help the lender determine how much money they are willing to lend you.

    Close the Mortgage

    Once the lender approves the mortgage and the appraisal is complete, you will need to sign the mortgage documents and pay any closing costs. The lender will then provide you with the funds you need to purchase the farm.

    4. Factors Affecting Farm Mortgage Rates

    If you are considering taking out a farm mortgage in Canada, it is important to understand the factors that can affect the interest rates you may be offered. Here are some key factors to keep in mind:

    Economic factors

    Economic conditions can have a significant impact on farm mortgage rates. When the economy is strong and interest rates are low, you may be able to secure a lower rate on your mortgage. However, when the economy is weak and interest rates are high, you may end up paying more in interest. It is important to keep an eye on economic trends and work with a knowledgeable mortgage broker who can help you navigate changing market conditions.

    Farm-specific factors

    The specific characteristics of your farm can also affect the interest rate you are offered on a mortgage. For example, lenders may take into account factors such as the size of your farm, the type of crops or livestock you produce, and the location of your property. Generally, farms that are larger, more productive, and located in areas with strong demand for agricultural products may be viewed as less risky by lenders, and may therefore qualify for lower interest rates.

    Creditworthiness of the borrower

    Your credit score and financial history can also play a significant role in determining the interest rate you are offered on a farm mortgage. Lenders typically prefer to work with borrowers who have a strong credit history and a proven track record of managing debt responsibly. If you have a low credit score or a history of missed payments or defaults, you may be offered a higher interest rate to compensate for the added risk.

    5. Challenges in Securing Farm Mortgages

    Securing a farm mortgage in Canada can be a challenging process, especially for new farmers or those with limited credit history. Here are some of the challenges you may face when trying to secure a farm mortgage:

    Limited Availability of Lenders

    Farm mortgages are a specialized type of loan, and not all lenders offer them. This can limit your options when it comes to finding a lender that is willing to work with you. Additionally, some lenders may only offer mortgages for certain types of farms or agricultural operations, which can further limit your choices.

    Results from a recent New Farmer Survey, put out by the National New Farmer Coalition and the University of Manitoba showed that over 70% of new farmers come from non-farming backgrounds and access to capital is one of the major barriers for these new farmers and one that impacts whether they start or continue to farm at all.

    High Down Payment Requirements

    Farm mortgages typically require a higher down payment than traditional home mortgages. This is because farms are considered a riskier investment than residential properties. You may need to put down as much as 25% or more of the purchase price, which can be a significant financial burden.

    Limited Collateral Options

    When securing a farm mortgage, lenders will typically require collateral to protect their investment. However, farms may have limited collateral options, especially if the majority of the property is tied up in crops or livestock. This can make it more difficult to secure a mortgage or may result in higher interest rates or more stringent loan terms.

    Seasonal Income Variability

    Farming is a seasonal business, and income can vary significantly from year to year depending on weather patterns, crop yields, and other factors. This can make it challenging to demonstrate a steady income stream to lenders, which may make it more difficult to secure a mortgage or result in higher interest rates.

    Navigating these challenges can be difficult, but there are resources available to help. The Canadian Agricultural Loans Act program is a loan guarantee program designed to increase the availability of loans to farmers and agricultural co-operatives. Additionally, initiatives like Slow Money and Farmworks where investors put money into a pool that goes towards local food and farm businesses can also help farmers.

    6. Government Policies Impacting Farm Mortgages

    When it comes to farm mortgages, government policies play a significant role in shaping the market. Here are some of the key policies that impact farm mortgages in Canada:

    Canadian Agricultural Loans Act

    The Canadian government offers the Canadian Agricultural Loans Act (CALA) program to increase the availability of loans for the establishment, improvement, and development of farms. Under this program, farmers can receive up to 80% financing (new farmers up to 90% financing) of the asset’s value to a maximum of $500,000 for property assets or up to $350,000 for all other eligible assets. Lenders can apply for a loan guarantee on behalf of the farmer. The maximum aggregate loan limit for any one farm operation is $500,000. CALA loans are subject to interest rates that are competitive with other loan options.

    Farm Credit Canada

    FCC is a federal Crown corporation that provides financing, insurance, and other services to Canadian farmers. FCC offers a range of loans, including operating loans, equipment loans, and real estate loans. FCC’s real estate loans are designed to help farmers purchase farmland, buildings, and equipment.

    Provincial Programs

    Provincial governments also offer programs to support farmers and the agricultural industry. For example, the Ontario government offers the Farm Loan Program, which provides loans to farmers for the purchase of land, buildings, and equipment. The program offers competitive interest rates and flexible repayment terms.

    Agriculture Grants Ontario: 107 Grants, Loans & More for Agricultural Business

    The Quebec government offers the Programme d’assurance stabilisation des revenus agricoles (ASRA), which provides income stabilization to farmers. The program is designed to protect farmers against large income declines caused by factors beyond their control, such as weather or market fluctuations.

    Do You Know These 57 Ontario Farming Grants & Loans?

    By understanding these policies, farmers can make informed decisions about financing their operations.

    7. Frequently Asked Questions

    If you are looking to obtain a mortgage for a hobby farm in Canada, you will need to meet certain requirements. First, you must have a steady income and a good credit score. Second, you will need to have a down payment of at least 20% of the purchase price. Finally, you will need to provide proof that the property you are purchasing is a hobby farm, meaning it is primarily used for personal enjoyment rather than commercial farming.

    To qualify for a farm mortgage in Alberta, you will need to meet certain requirements. First, you will need to have a good credit score. Second, you will need to have a down payment of at least 25% of the purchase price. Third, you will need to provide proof that you have experience in farming or that you have hired a farm manager with experience. Finally, you will need to provide a business plan that outlines your farming goals and how you plan to achieve them.

    If you’re a qualified producer under 40 you can use the Young Farmer Loan to take the next step in your agriculture career. Even if you have limited credit experience, by putting together a sound plan you can purchase a farm or agriculture-related assets of up to $1,500,000.

    The main difference between a regular mortgage and an agricultural mortgage in Ontario is the purpose of the loan. A regular mortgage is used to purchase a home or other type of residential property, while an agricultural mortgage is used to purchase a farm or other type of agricultural property. Agricultural mortgages typically have longer terms and lower interest rates than regular mortgages, but they also require a larger down payment.

    The minimum down payment required for a farm mortgage in Canada is typically 20% of the purchase price. However, some lenders may require a larger down payment, especially for larger loans or for borrowers with less than perfect credit.

    The length of a farm mortgage is typically determined by the borrower’s financial situation and the lender’s requirements. Factors that can affect the length of a farm mortgage include the size of the loan, the borrower’s credit score, the type of property being purchased, and the borrower’s income and expenses. In general, farm mortgages have longer terms than regular mortgages, with terms ranging from 10 to 30 years.

    8. Resources for Farm Mortgage in Canada

    Government Resources

    Funding Resources

    Other Resources

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