How to obtain an agricultural mortgage

Canada is and has always been dedicated to its farming communities. Although the rural population lives mainly in our three prairie provinces of Alberta, there are ranches, nurseries, agricultural co-operatives and farms across the country. Prince Edward Island, for example, is estimated to supply about 25% of Canada’s potatoes and Quebec has the largest number of dairy farms in the country, producing more than 30 million hectoliters (100 liters). ) of milk per year. Agriculture can be an extremely profitable business in the right conditions. So for those who enjoy working outdoors and have the energy to get up at four in the morning, seven days a week, agriculture could be the right path.

Again, it is not always easy to establish and maintain a farm of any type, and it is not always profitable. Not only does the operation of a farm require work and constant supervision, but getting a mortgage is a task in itself. Since farms need such dedication and labor to survive, many creditors do not lend money to anyone who arrives with a parcel of land. In fact, the approval process for mortgage loans for any rural property, whether for agriculture or residence, tends to be a bit more complicated and expensive than for an average urban household. However, if you are a potential farmer who is trying to make a name for himself, do not let that stop you from pursuing your dreams. Getting a mortgage for a rural property is possible and we will prove it to you.

What is the difference between a normal area mortgage and an agricultural mortgage?

Recent studies have shown that housing rates are on the rise in many Canadian provinces. In fact, some urban areas, such as Greater Vancouver, have become so expensive that many citizens have to travel outside the city to find more affordable housing. The closer you get to the Pacific coast, the more expensive the houses become. So going to the countryside is sometimes the only choice for people who do not want to leave the province. In many cases, it may be cheaper to buy a vacant lot in a place like Chilliwack and build a house there than to mortgage an existing home in Vancouver. You may even be able to make a decent profit by buying a rural property, building a house, and selling it when the land has gained value.

Fortunately for residents of British Columbia, the province has a large number of rural cities to choose from. However, mortgaging a rural property does not necessarily mean you have to build a stable and fill it with horses. There are some notable differences between using a rural home for business purposes and simply living in that house.

The biggest difference between an agricultural mortgage and what is known as a normal area mortgage is the intended use for the property. In other words, buying a rural property for subsistence or farming purposes are two different things. Regardless of the type of mortgage loan, the borrower will have the option of mortgaging a property with an already built home or mortgaging a plot of gross land (no building), with the intention of building a house on that property.

Normal surface mortgage

 Normal surface mortgage

With a normal area mortgage, the property can not be used to generate a profit and must generally be 10 acres or less to be approved. As with a normal mortgage, borrowers seeking to buy a piece of land or land with an existing home can pay a down payment of only 5% (depending on the lender). And just like a normal, high-ratio mortgage, the borrower will have to buy default mortgage insurance if they make a down payment of less than 20%. Obtaining a mortgage for a normal-sized property will also be easier because, in the event of default by the borrower, a lender must only give him 3 months to leave the property before foreclosure, whereas he must leave 12 months before the seizure of agricultural property.

Agricultural mortgage loan

house loan

The approval process for mortgages for farm properties, on the other hand, will be a little more complicated. First, agricultural mortgages generally require a down payment of 25% or more. The lender is going to take a much higher risk with borrowers looking to cultivate the land for farming. After all, much more time, money, and resources would go to financing a functioning farm than in a typical property, which means that the borrower might have more trouble making their mortgage payments.

For agricultural land, borrowers/investors are allowed to purchase as many acres as they wish at the time of sale. However, depending on the lender, these borrowers will likely only get a mortgage covering a period of the first 10 acres, usually with a house and a garage. Funding for any other land beyond those 10 acres and any other building beyond that house and garage will come out of the borrower’s pocket unless he makes a larger down payment.

Municipal assessment and zoning

Now, for any type of rural mortgage, whether it’s a farm or a normal acreage, potential borrowers will need to have their property assessed before they can do anything more. The lender will want to make sure that the property is worth its investment so that the area is respected. The appraiser will review the property, checking the houses and/or garages already built (appraisers are normally responsible for not taking external buildings, such as barns or other structures, into account when evaluating the property. ). However, what is even more important is the location of the property. For example, an extremely remote rural property will be much more difficult to resell if the borrower is in default and the property has to be seized. The closer the property is to a municipality, the more valuable it is.

The evaluator will also inspect the drinkability of the water and the skeptical system. In a typical suburb, water and sanitation capabilities are generally not a problem. On the other hand, with rural land, whether or not the area has potable water is certainly important. If the land is vacant, planning for the construction of a well and a skeptic pit should be considered. The same can be said of a rural house already built with a watering system and/or skeptic pit that should be repaired or fully replaced. So, to get approval from most lenders in this area, the borrower will need to acquire three documents:

  • A “Water Portability Certificate” not more than 60 days old (verification that the water is fit for human consumption).
  • If the skeptic pit is new, a certificate confirming compliance with provincial or municipal rules must be obtained. The certificate must also certify that the design and installation of the system does not exceed an acceptable level of soil and water contamination.
  • For new wells, a “Pummelers Certificate” is required, specifying flow and potability. If the property already has a well on site, the appraiser must review its flow and its potability and then report it to the lender.

Municipal zoning is another distinct part of the assessment of rural property and its future use as a residence or farm. Essentially, how the property is zoned will determine the use that the borrower can make of it.

  • If the property is listed as “residential county”, it means that the land is not licensed for agricultural purposes, so it will be easier to get approval from the lenders.
  • If the property is classified as “agricultural”, agriculture is permitted, but approval will be more difficult to obtain because any agricultural activity on the land must also be approved by the municipality in which the property is located. For this reason, the normal residential mortgage regulation is more limited in terms of properties that can be considered agricultural zoning, reducing the size of the area.

Program of the Canada Agricultural Loans Act

loan

For borrowers seeking mortgages for farming or other types of farming, the LCPA program is the most widely used secured loan system. This government-supported program is set up to help farmers and agricultural cooperatives obtain loans to create and develop new farms or to improve their existing farms. Farmer cooperatives can use these loans to produce, market and distribute their agricultural products. Most mortgage lenders, such as banks, credit unions and credit unions, issue and administer these types of loans and provide them within 60 days of approval.

With this program, a single farm can raise up to $ 500,000 to invest in land, farm equipment and construction or improvement of farm structures.

For example, if a farmer needs $ 350,000 to finance the construction of a barn and a grain elevator, he can still purchase an additional $ 150,000 to buy a plow or other equipment for his fields or livestock. . This same operation may also have access to an additional $ 350,000 for any other loan purpose, such as consolidation or refinancing. After obtaining the approval of the Minister of Finance, only one agricultural cooperative can receive a loan of up to $ 3 million for his organization. This loan guarantee program is also for the lender because the Canadian government will pay up to 95% of the net loss from a Canadian farm loan.

Know what you’re getting into

If you read this article, you are probably thinking of investing in rural or agricultural land someday. Whether this land is used for agricultural purposes or as a principal residence, it is best that you do a lot of research to find out what you are getting into. As mentioned above, the purchase of real estate in rural areas may seem financially stronger than the purchase of real estate in urban areas, and this also entails a fair share of risk, regardless of the province or territory in which it is located. which you live.

Real estate investing includes a number of different factors that must be considered when dealing with a property, even if it is just a vacant parcel of land. However, if you do the calculations and have a good investment strategy, you can certainly buy farm real estate, provided you are careful and patient enough to keep your commitment to the end.

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