Buying farmland is a bit different from buying a vacant residential lot. There are a few more details involved in the process that require a more specialized type of loan to finance these purchases. Farm mortgages are designed to finance the purchase of farm or agricultural land and have slight differences from typical residential mortgages.
Read on to find out more about farm mortgages and how to get one for your land purchase.
Key Points
- A farm mortgage is used to buy farm land, construct a new building or renovate existing structures on the land, or restructure a current farm loan.
- Farm mortgages tend to have longer loan terms and larger loan amounts than traditional mortgages.
- To secure a farm mortgage, you may need a significant down payment and a minimum farm income.
- Farmland is available for purchase from private sellers and government crown lands.
Can You Get A Mortgage For A Farm In Canada?
Yes, you can get a mortgage for a farm in Canada. However, obtaining a farm mortgage differs somewhat from securing a traditional mortgage for a residential property. Many banks and private lenders offer farm mortgages.
How Do Farm Mortgages Work?
Also referred to as agricultural mortgages, farm mortgages are designed specifically to finance the purchase of farmland or equipment and livestock used for agricultural purposes. These loans may also be used to improve or expand farmland.
Incorporated farms may also need a mortgage to finance land. For incorporated farms, getting a mortgage is similar to getting a mortgage for other business type. However, in this case, there are factors to specific consider that are specific to agricultural financing. For instance, lenders will assess the corporation’s income, expenses, and assets during the loan application process.
Features of these loans are as follows:
- Long Loan Terms. Compared to residential mortgages, farm mortgages tend to have longer terms, typically from 10 to 30 years.
- Flexible Repayments. You can choose to repay the loan through regular installments that include both principal and interest, or make interest-only payments every month with a lump sum principal repayment at the end of the loan term.
- Relatively Low Loan-To-Value (LTV) ratio. Lower LTV ratios are less risky for lenders, but some may be willing to allow LTVs as high as 90%. An LTV is the loan amount relative to the value of the property.
- Flexible Interest Rates. Farm mortgages can come with fixed or variable rates.
Requirements Of A Farm Mortgage
The requirements of a farm mortgage are somewhat similar to a traditional mortgage, but lenders will look at other factors as well to assess your ability to secure this type of loan. These factors apply to both revenue-generating farms and hobby farms alike:
Down Payment
You’ll need a bigger down payment for a farm mortgage compared to a traditional residential mortgage. Generally speaking, at least 25% of the purchase price may be necessary.
This is because the lender assumes a greater risk on borrowers looking to cultivate the land for farming. After all, much more time, money, and resources would go into financing a functioning farm operation than a typical living residence.
Credit Score
Like other loan types, good credit is typically required for farm mortgage approval. More specifically, lenders may require a credit score of at least 660 for farm mortgages, though some lenders may require an even higher score to reduce their risk.
That said, alternative lenders may be willing to extend farm mortgages to borrowers with credit scores under this threshold, depending on the strength of other factors, like income and the cash flow of the farmland.
Financial Health
Various financial factors will be assessed by your lender, including:
- Your Income. Like traditional mortgages, you’ll need to prove a healthy income that can comfortably cover your farm loan payments.
- The Farm’s Cash Flow. Lenders will look at your farm revenue, and take into account seasonal fluctuations in cash flow that are typical of the farming industry.
- Your Debt. Lenders will want to make sure that the income you have left over after paying all your current debts is enough to make payments on your farm mortgage. As such, lenders will want to look at your debt load relative to your income.
Types Of Agricultural Loans
Agricultural loans can be broken down into short-term and long-term loans. The option you choose will depend on your specific purpose and goals, as well as what the lender offers.
Short-Term Agricultural Loans
Short-term agricultural loans are more geared towards financing operating expenses. Amortization periods are typically in line with agricultural production cycles. Since these phases are typically short-lived (ie. anywhere from 3 to 18 months), short-term agricultural loans are more appropriate.
Long-Term Agricultural Loans
Long-term agricultural loans are more commonly used for the following:
- Finance assets that depreciate in value over time, such as machinery and livestock breeding
- Purchase, build, and develop land and structures
Amortization periods on long-term agricultural loans are typically longer than 18 months.
Difference Between A Regular Acreage Mortgage And A Farm Mortgage
You may be interested in buying a piece of farmland to simply build a home and enjoy lots of space. Or, you may have intentions of using the land for agricultural pursuits. Each purpose will determine the type of loan you take out, such as a regular acreage mortgage or a farm mortgage.
Here are the main differences between the two:
Intended Use Of The Land
How you intend to use the land will determine the type of loan you’ll require:
- Acreage Mortgages. Generally speaking, these mortgages help finance the purchase of rural land that will be used to live on, much like a lot in a residential subdivision.
- Farm Mortgages. These loans are more geared toward funding the purchase or improvement of land that will be used for farming purposes.
It’s important to understand municipal zoning rules in different areas to make sure your intended use of the property complies. For instance, zoning rules in a particular area may not allow the use of land for agricultural purposes. In this case, you’d need an acreage mortgage to finance the land.
Learn more: What Is A Rural Development Loan In Canada?
Size Of The Land
Land size also matters when it comes to the type of loan you can take out. For example, lenders may have specific rules surrounding the maximum land size they’ll finance for residential acreage mortgages.
Make sure the amount of land you need for your agricultural activities falls under the limit your lender allows. Otherwise, you may need a farm mortgage.
Down Payment
Down payments for farm mortgages are typically higher than for residential acreage mortgages. If you’re buying a large plot of land to build a home and live on it, then a smaller down payment of as little as 5% of the purchase price (under $500,000) may be enough, depending on a variety of other factors.
But if you intend to take out a farm mortgage to participate in agricultural activities, then a much larger down payment of at least 25% will be needed.
Bank Farm Loans
You may be able to finance the purchase of farm land through one of Canada’s big banks. Here are a few bank programs to consider:
Scotiabank Farm Mortgage
Scotiabank’s farm mortgage can be used to fund the purchase of farmland or make improvements to land.
Features:
- Loan amounts up to $1 million
- Yearly prepayments of to 10% of the original balance
- Amortization periods up to 25 years
- Loan terms of 1 to 10 years
CIBC Farm Mortgage Loan
CIBC’s farm mortgage can be used to finance the purchase of land and structures, or to build or renovate farm buildings.
Features:
- Variable or fixed interest rates
- Prepay any amount on your variable rate loan early
- Prepay up to 10% of the original amount of your fixed rate loan on any anniversary date
- Loan terms from 1 to 10 years
- Minimum loan amount of $25,000
RBC RoyFarm Mortgage
RBC’s RoyFarm Mortgage can be used to finance the purchase or expansion of farmland, or to buy equipment.
Features:
- Flexible payment frequency
- Provides a series of small loans
- Re-borrow against your mortgage up to the original amount without setting up an additional mortgage
- Some loans may be set up as interest-only for a set term
Government-Backed Farm Loans
The Canadian Agricultural Loans Act (CALA) is a loan program backed by the federal government and designed to finance the purchase and improvements of farmland and products.
Most lenders provide these government-backed loans to borrowers. Because these loans are guaranteed by the government, the risk for the lender is reduced. As such, lenders may be more willing to provide these loans for higher amounts.
Use Of Loan Funds
The funds from a CALA loan must be used for the following:
- Establishing, operating, or improving the farm
- Processing, distributing, or advertising farming products by a cooperative association
- Assets financed with a CALA loan must be used in that farming business
Loan Amounts
- Financing with a CALA loan is available for up to 90% LTV
- A maximum loan amount of $500,000 is allowed
Loan Amortization
Amortization periods are available as follows:
- For land: 15 years
- For all agricultural-related needs: 10 years
Fees
- A fee of 0.85% of the loan amount must be paid to the Canadian government
Eligibility
To qualify for a CALA farm loan, you must meet the following requirements:
- Be engaged or have intentions of engaging in farming activities
- Have a gross or annual revenue (or anticipated revenue) of no more than $10 million
- Operate a farming business in Canada
Benefits Of A Farm Mortgage
Farm mortgages come with the following perks:
- Large Loan Amounts. Farmland is expensive, but so is the equipment and machinery required for operations. Farm mortgages provide large amounts of capital for this type of big investment.
- Long Loan Terms. Opting for a long loan term allows you to spread out your repayments, making it easier to fit your loan payments within your budget.
- Flexible. The funds from a farm loan can be used for a variety of purposes related to buying or improving the land and assets associated with it, including expanding operations.
- Tax Perks. The interest you pay on a farm mortgage may be tax-deductible, which means you reduce your taxable income and the total income taxes you need to pay.
Where Can You Buy Land For Farming?
Farmland resources can come in several forms, including the following:
Crown Land
Crown land is land owned by a provincial or federal government. You may request to buy or lease Crown land in your province, as long as you meet provincial requirements. To purchase or lease Crown land, you’ll need to inquire and apply through the appropriate Ministry in the province:
- British Columbia
- Alberta
- Saskatchewan
- Manitoba
- Ontario
- Quebec
- New Brunswick
- Nova Scotia
- PEI
- Newfoundland & Labrador
Assignment Of An Existing Lease
An assignment refers to the complete transfer of an existing lease from the current tenant to a new tenant. You may acquire farmland through an assignment by going through your province’s Crown Lands Administration office.
Private Farmland
Acreage and farmland may be available for purchase or lease through the private sector. Landowners may list their properties for sale through similar channels as residential properties. Consult with a real estate agent to find out what is available.
Final Thoughts
To buy a large rural lot to live on or to get into the farming or agricultural industry, you’ll likely need a more specialized loan to finance the purchase of land. Depending on your exact goals, a farm or agricultural mortgage may be appropriate. Be sure to work with a seasoned real estate agent and mortgage specialist who understands these types of purchases and loans.
