Dreaming of upping sticks and moving to the country in favour of a gaggle of geese or a crowd of cows? Or perhaps you’re already farming land but have your eye on a new investment. Whatever your reason for needing a commercial mortgage for a farm, this guide is here to help you make an infrared decision about your next steps.
We’ve included the most commonly asked questions but if there’s something we’ve missed and you need the answer, make an enquiry and an expert will get back to you shortly.
What is a commercial farm mortgage?
Also known as an agricultural mortgage, a commercial mortgage for a farm is a type of loan that allows borrowers to finance the purchase of a farm, agricultural land or building. In some circumstances, borrowers have even been known to apply for this type of loan to create renewable energy sites such as wind farms.
There are approximately 212,000 farm holdings, which vary widely in size across the UK and though some people are able to finance the purchase of a farm with savings or cash, many people apply for a commercial mortgage.
The amount of banks willing to provide commercial loans for farms has reduced in the wake of an economic downturn though that’s not to say getting an agricultural mortgage is impossible, especially if you have the right advice.
Will I get approved for an agricultural mortgage?
Every lender or bank has their own set of terms and conditions that they require their borrowers to meet, so even if you’ve been rejected by a lender in the past, it may still be possible to get approval from another.
Commercial mortgage lenders refer to the Basel III framework when assessing borrowers too. This is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis between 2007-09.
Under the framework, banks are encouraged to improve their ability to absorb shocks arising from financial and economic stress. For many banks, this means increasing their capital and avoiding high risk lending, particularly to small-medium enterprises.
If you make the decision to apply for a commercial farm mortgage, seeking advice from a mortgage broker can help you prepare your application and position yourself as a low risk borrower.
Our experts can highlight any potential issues on your application and can advise you on how best to improve them or offset the perceived risk to your borrower.
How do lenders decide if they can approve my commercial farm mortgage application?
Your ability to get approved for a commercial farm loan will also largely depend on your own circumstances from your:
- Credit history
- Income and expenditure
- The type of property / land that you want to buy
- The size of your deposit
When a lender receives an application for a commercial farm mortgage, they look at these circumstances to decide if you meet their criteria and if you present a higher risk for defaulting on your repayments.
A lender wants to feel reassured that you can afford to repay your loan, which is why factors such as low income or bad credit can reduce your choice of lenders and even affect the amount of interest you’re charged for your mortgage.
Can I get a commercial farm mortgage with bad credit?
Having bad credit doesn’t automatically rule you out as a borrower but it can exclude you from accessing the best rates because low interest rates are usually available for borrowers who present low risk.
Credit issues can cause apprehension amongst some lenders but there are those that may be more willing to approve under these circumstances.
The date that the bad credit occurred can affect your chances of approval and also the severity of the bad credit too. Some may be unable to accept bankruptcy but may, if other conditions are met, approve an applicant who has repaid a CCJ.
Researching and comparing lender’s eligibility criteria can be time consuming. Frustratingly, comparison websites don’t always include all UK commercial farm mortgage lender’s rates as some banks only provide their rates directly.
Thankfully, a mortgage broker can use their knowledge of lender rates and their access to the market to quickly and efficiently find you the best deal.
How much can I borrow with an agricultural mortgage?
There are lenders for commercial farm mortgages that provide loan-to-value rates of 70% of the value of the property or land. As a borrower that would mean you need a 30% deposit.
LTV rates also vary, with some lenders providing higher LTV rates in circumstances where the borrower is able to prove they have good affordability based on their income and the amount they’re applying to borrow.
Lenders also look at your annual income to calculate how much you can borrow, as well as your future business projections and profit. Having your accounts in order and certified by a chartered accountant is important so it can be a good idea to arrange this ahead of making any application for finance.
A mortgage broker can manage correspondences from finance professionals such as accountants which can help speed up the process and take the pressure away from you.
Their experience of the mortgage process for commercial loans can help you find the lenders who are able to offer you higher LTV rates but more importantly, they’ll only ever recommend suitable lenders that are affordable for you.
How much deposit do I need for a commercial farm mortgage?
Deposit requirements also vary heavily depending on the lender you chose and usually, the higher the risk you present as a borrower, the bigger deposit you’ll need. That’s certainly not always the case but keep in mind that having a larger percentage of a commercial property’s value means you would own more equity upfront and could help you access a wider choice of lenders.
Alternatively, if you’re looking for a commercial mortgage for a farm with a smaller deposit requirement, this may be achievable if your circumstances meet your chosen lender’s requirements. A lender may be more likely to approve a lower LTV agricultural loan if they calculate that the terms are right for you and your business.
Ask a broker to check your eligibility ahead of applying for a commercial farm mortgage to avoid a rejection that could negatively impact your credit score and affect your ability to obtain finance in the future.
Commercial farm mortgage FAQs
What is the typical term for a commercial farm mortgage?
Unlike residential loans, the terms of commercial loans typically range from five years (or less) to 20 years, and the amortisation period is often longer than the term of the loan.
A lender, for example, might make a commercial loan for a term of seven years with an amortisation period of 30 years.
What is the difference between a commercial and residential mortgage?
The main difference between a commercial mortgage and a residential mortgage is that the value of the land or property is usually much larger.
A commercial farm mortgage is a loan secured on property that isn’t your residence whereas a residential mortgage is.
Can I get a commercial farm mortgage to let out a farmhouse?
Lots of people have desires to let out barn conversions or quaint farm cottages which are common on many UK farms and this can be a great source of income.
Buy-to-let mortgages are sometimes sought in incidences like this but another alternative solution could be a semi-commercial mortgage.
This type of loan can be used to finance a purchase for land / a building that will be used for both commercial and residential purposes.
This type of loan is sometimes sought by those wishing to run an on-site hotel or B&B as well as grow crops or use the land for other business purposes.
Contact an advisor to learn more about which type of mortgage would be the most viable option for you.
Should I get an interest-only or repayment commercial farm mortgage?
A commercial farm mortgage is usually provided by a specialist lender on a repayment or an interest-only basis.
A repayment farm mortgage has terms that stipulate the borrower must repay the capital and the interest of their loan on an agreed date each month.
An interest-only farm mortgage allows the borrower to repay the interest of the loan on a set date (usually monthly) and then clear the capital of the loan at the end of the mortgage term.
Who can I speak to about a commercial farm mortgage?
Getting finance to purchase farming land, whether to rent out or grow crops, is a big decision and good advice could help you save money and time.
If you’d like to know more about commercial mortgages for farms or agricultural land, call us or make an enquiry and we’ll appoint you the best advisor for your circumstances.