Agricultural mortgages

There are over 2,000,000 farms in the US, and in 2021, the average farm had a turnover of more than $216,000 per year.

Clearly, farming is big business, which means those who wish to buy a farm should use a business loan. Agricultural mortgages are specialised financial products designed to work with the unique economics and working patterns of the farming industry. More flexible than many other types of property loan, they can open the door to ownership for the first-time farmer or plough the way for experienced professionals seeking to expand their farming footprint.

What is an agricultural mortgage?

An agricultural mortgage (sometimes called a farm mortgage) is a long-term loan used to buy rural real estate or to release equity from a farm property. Agricultural loans are similar to standard commercial mortgages except they are tailored to fit the unique economics of the agricultural industry.

How do agricultural mortgages work?

Agricultural mortgages are usually paid back over 1 – 25 years and they may be capital + interest loans (you pay interest and some of the borrowed capital back each month), or interest-only loans (you only pay interest each month and then make a lump sum repayment at the end of the term). Mortgages of up to 90% of LTV (loan to value – the size of the loan in comparison to the value of the property) may be possible, depending on the status of the borrower. The lender will take a legal charge over the property as security.

Key considerations before taking out an agricultural mortgage

• Like all borrowing, you must be confident that you can meet the mortgage terms and conditions and the repayment plan. The golden rule – if the loan will stretch your finances too tight, leaving little room for the unexpected, then it may be too soon to apply for an agricultural mortgage.
• If you are buying a working fam, or land, or buildings to expand your agricultural business, will the price you are paying return value over time? Unlike residential mortgages, which pay for a home that you may or may not expect to make a profit on, agricultural mortgages are business loans, so a business perspective should be applied.
• Many farms come with ties or covenants that place restrictions on their use, or even who can live there. Check the terms of such agreements thoroughly. Will they impede the plans you have for the property you are buying?
• Consider the tax implications of the way you structure the loan. Professional advice in this area is a must.
• Farming or similar experience is not always necessary to obtain an agricultural mortgage, but it helps. Lenders will look more favourably on the applications of those who can show past and fruitful endeavours in the sector. If your experience is low, or non-existent, you can enhance your application with a solid business plan that has the input of professional farm planners. You may also wish to engage an experienced manager to run the farm business. If you do, emphasise their credentials in your plan.

What types of property can you buy with an agricultural mortgage for?

Agricultural mortgages can be used to purchase almost any type of rural business property – including commercial farms, farmhouses, lifestyle farms, land, stables, livery yards, renewable energy sites, other rural businesses, even country estates. Agricultural mortgages may also be used to pay for renovation or development costs of farm property you already own, or to release equity from rural real estate.

Key considerations before taking out an agricultural mortgage

Lenders may provide up to 90% of the value of the property to be purchased, depending on the status of the borrower and the profile of the purchase property. Ultimately, your income, the farm’s income, the price you are paying for the property, and other factors such as the amount of existing debt the borrower is carrying, will decide how much you can borrow.

How long can I borrow the money for?

Agricultural mortgages may be repaid over 1-25 years. Repayments can be made monthly, quarterly, or annually, depending on the farm’s cashflow.

What affects my mortgage repayment amount?

Three important features will affect the sum you pay each month:

Agricultural mortgages may be obtained as interest-only, or capital + interest loans. You will pay less per month with an interest-only loan, but then you will need to repay the entire borrowed sum at the end of the term.

Rates for agricultural mortgages are typically higher than those for residential properties, and they may be fixed or variable. Fixed rates may be locked in for as long as 10 years, although the longer the period, the higher the interest rate you will pay. Variable rates can go up and down according to the Bank of America base rate. This can cause your repayment sum to fluctuate which could place a burden on your farm’s cashflow. Additionally, unlike residential mortgages, where often, ‘one rate fits all’, agricultural mortgages are business loans and lenders will set the rate for each loan on a case-by-case basis. Your risk profile, the property profile, and the strength of your business plan will influence the interest rate you pay.

The shorter the loan period, the higher your repayment sum each month.

Can I get an agricultural mortgage with poor credit?

Possibly. It will depend on the LTV you are seeking, the size of your cash deposit, (or the value of other assets offered as security), and factors, such as your experience in the farming industry. Even if you’ve been turned down elsewhere, it may still be possible to secure the mortgage you need. Contact Swoop to find out more.

How can I find the best deal on an agricultural mortgage?

The agricultural mortgage sector is a niche area, with different rules of application. Borrowers seeking such a loan may find themselves forever searching and making applications to lender after lender. The delays this can create could cost you the property you are chasing. Instead, working with a broker, who can access many types of agricultural mortgages from a wide range of lenders, is a better way to go. No more cold calls and endless demands for information. Simply indicate your funding needs, tell us about your farming plans, and leave the rest to us.

Get started with Swoop

Why plant one seed when you can plant many? Get the best rate, the best terms and the right agricultural mortgage for your needs. Contact Swoop today.