"Is it time to "fix" your farm mortgage interest rate?"
Recently, the Bank of Canada rate increased its prime rate by a quarter of a percentage to .75%. This saw Canada’s charter banks increase their prime rates to 2.95%. Bank prime rates have not exceeded 3.0 per cent since January 22, 2009, and posted five-year mortgage rates have not exceeded 5.0 per cent since March 2014.
“Since 1975, the majority of the time the variable interest rate has been the better option and has saved producers money. We’re seeing that the world’s central banks are reviewing their interest rate policies. Economists feel that the Bank of Canada’s move signals a turning point to a longer-term trend in rising interest rates, and we could see a slow climb in interest rates over the next 18 months.”
Alberta farmers have a strong balance sheet, says Dehod. “In 2016, an average Alberta farm had assets of $3,988,598 with total liabilities of $ 507,003 for a net worth of $3,481,595 or 87.2 per cent. However, equity doesn't make interest payments - profits do. A ¼ of a per cent interest change if all interest was based on prime would see an additional $1,267 cost to that farm. But not all debt is variable.”
Outstanding farm debt in Alberta has grown from $15,890m in 2012 to $21,322m in 2016, says Dehod. “Many beginning farmers have incurred debt to finance entrance into the business of farming or expansion. Their debt loads are much larger than the average Alberta farmer and are subject to some financial risk should interest rates rise. The increase in debt has followed the increase in farm land values.”
The majority of farm managers have chosen the variable rate term on their mortgages or one year fixed in the past. “Going forward, as mortgages are reviewed, a five-year fixed term should be part of the discussion. Mind you, peace of mind comes at a price as five year fixed mortgages are presently posted at 2.0 per cent higher than prime. Some farm managers have been able to negotiate a better long-term rate. As interest rates continue to climb in the next couple of years, this difference could quickly erode. Changes in Canada’s and the world’s economies will drive variable rates higher. A fixed rate will give the borrower certainty in their interest costs, and that certainly is worth something to those who have a higher debt load. A small premium on fixed rate mortgages could represent inexpensive protection to an interest rate increase into the future.”
For more information, see the Farm Manager – Your Business resource, A Farmer’s Guide to Agricultural Credit, or call the Alberta Ag-Info Centre at 310-FARM (3276).