Whether you’re just starting your farm or adding to your operation, you should know the ins and outs of your farm mortgage and loan options. Your lender is a great source of information.
Farm lenders want to be a partner in your business. We make better recommendations if we have full disclosure on what you have and what the needs of your business are.
Lenders can help farmers weigh their financial options by looking at the big picture, not just the borrowing side of the equation. For example, if you’re considering buying more land, you need to have a good understanding of your balance sheet—and we can review that with you. You also need to be certain your income will support the debt you’re going to take on so that you’re able to pay that loan back within 25 years.
Selecting an interest rate term, or length of time for paying back your debt, is a vital piece of the puzzle, as well. By locking in an interest rate over a longer period, you can protect yourself from interest rate spikes, however, that may also mean you miss out on lower rates. Ask your lender to review multiple scenarios so you can make the choice that works for you.
While interest rates are relatively low right now, between 3 and 4 per cent, it’s certainly possible that they increase again. Prudent farmers have to consider interest rates and say ‘Okay, today I can borrow for this at 3.5 per cent, but what happens if rates increase to 4 or 5 per cent? What’s the backup plan? Will I be able to afford those payments if interest rates go up?’
You also have to look at all your mortgage options. If you’ve locked your mortgage in for five years, each year you might have the option to prepay 20 per cent of the remaining balance with no penalty. That prepayment will make a big difference down the road; the quicker you pay it back, the less interest you’ll pay overall. In some cases, you may even be able to arrange for a smaller prepayment of 10 per cent in exchange for a lower interest rate.
You need to ask lots of questions to find the absolute best arrangement for you and your business.
It makes sense to maintain a good working relationship with your lender—especially when times are going well, so that the trust is there when times are more challenging. Lenders want to be your partner and we’ll do everything we can to help.
Adapted from “The ins and outs of farm mortgages” on Farms.com, originally published on June 8, 2020.