Canada is, and always has been, devoted to its farming communities. In fact, while our three prairie provinces of Alberta, Saskatchewan, and Manitoba are where a large part of the country’s rural populace lives, there are ranches, nurseries, agricultural co-ops and farms of every variety all over the country. Prince Edward Island, for instance, is known for supplying approximately 25% of Canada’s potatoes, and Quebec has the most dairy farms in the country, producing over 30 million hectolitres (100 litres) of milk each year. Farming and agriculture can be an extremely rewarding and profitable business under the right set of circumstances. So, for those who enjoy working in the open air and have the strength to get up at four o’clock in the morning, seven days a week, farming might be the right avenue for you.
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Then again, establishing and maintaining a successful farm of any kind is not always simple and it is definitely not cheap. Not only does running a farm take constant work and supervision, but securing a mortgage for it is a task in and of itself. Being that farms take such dedication and manpower to stay afloat, many creditors won’t lend money to just anybody that walks in the door with a plot of land in mind. Actually, the mortgage approval process for any rural property, whether it’s for farming or residency, tends to be a little bit more complicated and expensive than the average suburban household. However, if you’re a would-be farmer looking to make a name for yourself, don’t let that this stop you from pursuing your dreams. Securing a mortgage for a rural property is possible and we’re going to show you how.
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What is the Difference Between a Regular Acreage Mortgage and a Farm Mortgage?
Recent studies have shown that housing rates are on the rise in many Canadian provinces. In fact, certain urban areas, like Greater Vancouver, have become so expensive to live in that many of its citizens need to move outside of the city in search of more affordable housing. After all, the closer you get to the Pacific Coast, the more expensive houses become, so heading out to the country is sometimes the only choice for those unwilling to leave the province. In many cases, it can actually be cheaper to buy a plot of unused land in a place like Chilliwack and build a house there, than it is to mortgage an existing home in Vancouver. You might even be able to make a decent profit by buying that rural property, building a house, then selling the whole thing when the land eventually rises in value. Luckily for British Columbia residents, the province does have a large number of rural towns to pick and choose from. However, mortgaging a rural property doesn’t necessarily mean that you need to build a barn and fill it with horses. There are a few notable differences between using a rural home for business purposes and simply living in that home as a primary residence.
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The most significant distinction between a farm mortgage and what’s known as “acreage” mortgage, is the property’s intended use. Simply put, buying a rural property for living and farming purposes are two different things. With either type of mortgage, the borrower will have the option of either mortgaging a property with a house already on it or mortgaging a plot of “raw land” (no buildings), with the intention of constructing a home on it.
With a regular acreage mortgage, the property cannot be used to generate a profit and usually has to be 10 acres or less to be approved. Just like a normal mortgage, borrowers looking to purchase either raw land or land with a home already built on it, are able to make a down payment of as little as 5% (depending on their lender). And, just like a normal high-ratio mortgage, they’ll have to purchase default mortgage insurance if they make a down payment of less than 20%. Securing a mortgage for a regular acreage property will also be a bit easier because, in the event of a borrower defaulting, a lender only needs to give them 3-months to vacate the property before foreclosure, while they must give the borrower a full 12-months before foreclosing on a farming property.
The mortgage approval process for farming properties, on the other hand, is going to be a little more complicated. First of all, farm mortgages usually require a down payment of 25% or more. The lender is going to be taking a much higher 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, meaning the borrower might have a harder time keeping up with the mortgage payments.
When it comes to any kind of farmland, borrowers/land investors are permitted to buy up as many acres of land as they want when it’s for sale. However, depending on their lender, those borrowers will likely only be able to secure a mortgage that covers the first 10 acres, often with one house and one garage included in the contract. Any other land beyond those 10 acres and any other buildings that exceed that one house and garage, will come out of their own pocket unless they make a much larger down payment.
Appraisal and Municipal Zoning
Now, for any type of rural property mortgage, whether it’s for farming or a regular acreage, potential borrowers will need to have the property appraised before anything can be done. The lender is going to want to make sure the property is worth their investment, so they’ll have the area inspected. The appraiser will go over the property, checking any homes and/or garages already built (appraisers are normally instructed not to take any out-buildings, like barns or other structures, into consideration when evaluating the property), and the size of the acreage itself. However, what’s even more important is the property’s location. For example, a rural property that’s extremely remote is going to be much harder to resell if the borrower ends up defaulting and the property needs to be foreclosed. The closer the property is to a municipality, the more valuable it becomes.
The appraiser will also inspect property’s water potability and septic system. With a typical suburban household, water and sewage capabilities are not usually an issue. With rural land, however, whether or not the area has running drinkable water is definitely an important factor. If the land is bare, but you’re planning on building a home on it, the construction of a well and septic system is something that needs to be considered. The same can be said about an existing rural home with a drinking and/or septic system that needs to be repaired or replaced entirely. So, to secure most lenders approval in this area, the borrower will need to acquire three documents:
- A “certificate of water portability”, no more than 60 days old (a verification that the water is fit for human consumption).
- If the septic system is new, a certificate confirming that it complies with the provincial or municipal rules must be acquired. The certificate must also testify that the system’s design and installation do not exceed an acceptable level of soil and water contamination.
- For new water wells, a “well driller’s certificate” is required, detailing the flow rate and water potability. If the property already has a well on site, the appraiser must examine its water flow and potability, then report it to the lender.
Municipal zoning is another distinct part of both a rural property’s appraisal and future use as a residence or farm. Essentially, how the property is zoned will determine what the borrower is able to use it for.
- If the property is listed as “county residential”, it means that the land is not permitted for farming purposes, therefore it will be easier to gain most lenders’ approval.
- If the property is listed as “agriculture”, farming is permitted, but approval from a lender will be harder to get since any farming activity on the land also need to be approved by the municipality in which the property resides. Because of this, normal residential mortgage regulations are more limited when it comes to properties that qualify as agricultural zoning, making the financeable area of the land smaller.
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The Canadian Agricultural Loans Act Program
For borrowers looking to secure a mortgage for the purposes of farming or other types of agriculture, the CALA Program is the most commonly used system of guaranteed loans. This Government backed program is set in place to help farmers and agricultural co-operatives (also known as “farmer’s co-ops”) acquire loans so they can establish and develop new farms, or make improvements to their existing ones. Farmer’s co-ops can use these loans to produce, market and distribute their agricultural products. Most mortgage lenders, such as banks, credit unions and “Caisses Populaires” (Quebec credit unions) do issue and administer these types of loans and will grant them within 60 days of their approval.
With this program, a single farm operation can secure a loan of up to $500,000 to invest in land, farming equipment, as well as the building and/or improvement of farming structures. For example, if a farmer needs $350,000 to finance the building of a barn and grain silo, he’ll still be able to acquire another $150,000 to purchase a plow or other equipment for his fields or livestock. That same operation can also gain access to an additional $350,000 for any other loan purpose, such as consolidation or refinancing. After gaining the Minister of Finance’s approval, a single agricultural co-op can receive a loan of up to $3 million for their organization. This loan guarantee program also works out for the lender, because up to 95% of the net loss from a Canadian Agricultural Loan will be repaid by the Canadian Government.
Visit the Agriculture and Agri-Food Canada webpage to see whether you might be eligible for the CALA Program.
Know What You’re Getting Into
If you’re reading this article, you’re likely thinking about investing in rural or farm land some day. Whether that land is going to be used for farming purposes or just as your primary residence, it’s best that you do a lot of research beforehand so you know exactly what you’re getting into. As we mentioned earlier, while buying rural real estate might appear to be more financially sound than buying urban or suburban real estate, it definitely comes with its fair share of risks, no matter what province or territory you live in. Just like any form of real estate investment, there are a number of different factors that need to be taken into consideration when it comes to the property, even if that property is just an unused plot of land. However, if you do the math and have a good investment strategy, buying up agricultural real estate can certainly pay off, as long as you’re being cautious and patient enough to see your commitment through until the end.