Rural properties with lots of land are becoming increasingly popular among Canadians who are finding themselves being priced out of properties closer to urban areas. If you’re planning to buy a property outside the city with lots of space, you may want to look into a rural development loan in Canada or a rural mortgage.
The question is, what is this kind of mortgage, and is it any more affordable than a conventional mortgage or any other home loan product? And what are the eligibility requirements to get approved?
Key Points
- A rural development loan in Canada is used to buy or expand farmland.
- These loans are available to individual farmers or members of agricultural co-operatives.
- The Canadian Agricultural Loans Act (CALA) Program oversees rural development loans in Canada.
- Rural mortgages are also available to people looking to buy homes in rural areas.
What Are Rural Mortgages?
A rural mortgage is a loan product that lenders offer buyers who are planning to purchase land in a rural area outside of an urban centre.
The truth is, that buying a rural property or acreage is a little more complicated than buying a typical home in the city, and the mortgages associated with financing such properties can be tricky. Even though the properties themselves are cheaper, lenders generally see rural properties – typically those on larger parcels of land – as riskier investments compared to the average mortgage. As such, these mortgages are harder to get approved for.
| Why Are Rural Or Farm Mortgages Harder To Qualify For? Rural mortgages generally have more requirements and higher down payment requirements. Moreover, you may need to provide a cash flow analysis and a business plan that shows the lender how you plan to use the money to establish or grow your business. |
Where Can You Get A Rural Mortgage?
You can get a rural mortgage from most big banks and some alternative lenders. The government of Canada also offers a loan guarantee program (Canadian Agricultural Loans Act (CALA)) to help farmers gain access to funds needed to establish or develop their farms.
What Is The Canadian Agricultural Loans Act (CALA) Program?
The CALA program incentivizes lenders to provide farmers and agricultural co-ops with funds needed to establish or grow their businesses. Lenders that offer rural development loans under the CALA program will be guaranteed 95% of their losses from the government.
This program is available through most big banks and can provide a maximum loan amount of $500,000 to buy land or build or renovate buildings, or $350,000 for any other purposes. Agricultural co-operatives can take out a maximum of $3 million in financing.
Farmers may use the funds from these loans to start or expand farms, and co-ops can use these loans to develop, distribute, or advertise farming products.
Canadian Agricultural Loans Act (CALA) Program: Snapshot
| Repayment Schedules | Monthly Quarterly Semi-annually Annually |
| Prepayment Options | 10% prepayment permitted on a fixed-rate loan without any penalty |
| Loan Amounts | $10,000 — $500,000 |
| Collateral | Farm property Liquid investments Other business assets |
Canadian Agricultural Loans Act (CALA) Program Loan Eligibility Requirements
To qualify for a rural development loan in Canada, you must be either:
- A current farmer, either full- or part-time, or someone who is just starting a farm, or
- A member of an agricultural co-op comprised of mostly farmers
Documents Required
If you're just starting a farm, you may need to provide your lender with the following:
- A business plan
- An income tax form proving that you don’t collect farm income for a minimum of one year out of the previous six years
If you're a member of an agricultural co-op, you may need to provide the following:
- A current tax return proving that most of the co-op members earn a farm income
What Can The Rural Development Loan Under The Canadian Agricultural Loans Act (CALA) Be Used For?
The funds from a rural development funds may be used for the following purposes:
- Purchase property on a farm
- Build or repair any building or structure on an existing farm
- Purchase a structure at another location to be moved to your farm
Keep in mind that the construction or renovation of any structure must benefit the operation of the farm to qualify for funds from a CALA rural development loan.
Ineligible Uses Of Rural Development Loan Funds
There are some purposes that do not qualify for a rural development loan from CALA, including the following:
- Improvements to the family home, even if it’s located on the farm
- Quota purchases
- Consolidate ordinary loans from a lender
- Purchase short-term feeder livestock
Should You Choose A Fixed-Rate Or Variable-Rate Rural Mortgage?
Rates on rural mortgages rise and fall according to market conditions at any given time, just like they would fluctuate with conventional mortgages. This is why it’s important to determine whether you prefer a variable- or fixed-rate rural mortgage. There are pros and cons to both options.
Why Choose A Fixed-Rate Mortgage?
Fixed-rate mortgages provide more stability over the life of the mortgage, as each payment you make every month, stays the same. If rates increase after you are locked into a fixed-rate mortgage, you’re saving money.
If you’re on a tight budget, you might want to opt for a fixed-rate mortgage so you can have a more predictable payment structure.
Why Choose A Variable-Rate Mortgage?
Variable-rate mortgages are attractive to some borrowers because the rate is calculated according to the prime rate and has historically been lower than the fixed rate. Payments are typically fixed over a certain time period, but as interest rates fluctuate, the amount that goes toward the principal and interest will fluctuate too.
If rates continue to fall, a variable-rate mortgage could offer savings over time. But if rates increase, your interest payments could increase significantly.
What Factors Do Lenders Look At Before Approving A Borrower For A Rural Mortgage?
Aside from the LTV ratio and the borrower’s financial history and health, the property is heavily examined before approval. The property’s eligibility is more important than the borrower’s financial health and personal details.
Lenders look at many factors when determining whether the property is eligible for approval, such as:
- The condition of the property (land, structures, water potability, etc.)
- The location of the property (distance from nearest urban area, country/region, etc.)
- How easy it is to resell the property if the borrower is unable to make their mortgage payments
Once the property passes these criteria, the lender will then determine whether the borrower is eligible to be approved for a rural mortgage.
What If You Can’t Get Approved?
If you get turned down for a mortgage that you need to make a real estate purchase in a rural area, there are other avenues that you can take if you find that conventional banks and lenders are unwilling to loan out the money needed to finance a rural property.
Consider Alternative Lending Options
More and more alternative lending resources are popping up in the mortgage realm for borrowers to take advantage of. Lending rules have become tougher ever since the housing bubble a decade ago. As such, lenders have tightened the nooses when approving borrowers for home loans.
Private lenders are filling the void and offering an alternate route. That said, working with private lenders comes with its own set of disadvantages.
Rural properties financed by private lenders come under heightened scrutiny. For this reason, rural properties are often unable to qualify for the same amount of capital compared to properties in urban centres.
For instance, urban properties can usually be approved for a higher loan-to-value (LTV) ratio (which measures the loan amount compared to the property value). Sometimes, the LTV may be as high as 95%. In comparison, rural properties are usually only eligible for no more than a 65% LTV ratio.
The Bottom Line
A rural development loan may be required if you’re a farmer looking to start or expand a farm. Or if you’re a member of an agricultural co-op looking to process, distribute, or advertise farming products. If you’re simply looking to move out of the city and relocate to a rural area, a rural mortgage may be best. It’s important to understand what these types of loans are, the specific purposes they serve, and the eligibility criteria to ensure you can get approved.
