We look at how mortgages for buying or refinancing farm property works, including what lenders consider and how to get the best deal.
If you’re buying farm buildings or farmland, it’s unlikely you’ll already have the cash available to buy it because of the high prices involved so you’ll need a mortgage to finance the purchase.
Agricultural property is a specialist area and buying it can be complex, especially if it has mixed uses – it could include holiday properties and a farm shop as well as the farm itself, for example – so you’ll need a specialist agricultural mortgage. There may also be specific legal aspects that make the process more complicated.
What is an agricultural mortgage?
An agricultural mortgage is a type of commercial mortgage for borrowing more than £25,000 over a long period, although mortgage terms can range from as little as one year to 30 years, depending on the lender.
Agricultural mortgages tend to be bespoke products, so the interest rate you pay will be based on your specific circumstances, including your level of experience in the farming industry, the value of the property, the trading figures of the business and your credit history.
They can be used for extending or improving agricultural property you already own, buying out a co-owner, refinancing a property and even buying or creating a renewable energy generation site, such as a wind farm, as well as purchases.
How do they work?
Like residential mortgages, agricultural mortgages are secured on property, which is usually the one you’re buying or refinancing. You may be able to borrow up to 60-70% of the property’s value, although up to 100% may be possible if you have additional property or assets to use as security.
Interest rates can be fixed or variable and the frequency of your repayments can often be tailored to suit your cash flow – they could be monthly, quarterly or annually. The mortgage can be taken out on a repayment or interest-only basis.
Unlike residential mortgages, which are usually paid off by a life insurance policy if you die before the end of the term, agricultural mortgages can be passed on to the next generation and continue to be paid off under the same terms.
To assess the level of the risk they would be taking on by lending to you and decide whether to grant you a mortgage, the interest rate to charge and how much you can borrow, the lender will look at a range of factors. These are likely to include:
- The value of the property based on a specialist survey.
- How much experience you have in farming – you won’t necessarily be turned down if you don’t have any farming experience but you’re likely to be offered the best rates if you do.
- The projected income of the farm and sometimes your business plan. The lender will want to see two to three years of trading accounts as evidence that it’s likely to generate enough money for you to be able to afford to repay the mortgage.
- Your personal finances, including your income and outgoings.
- Your credit record. It’s still possible to get a mortgage if you’ve had credit problems in the past depending on the lender but you’ll be offered a less favourable interest rate.
- How much you are able to put down as a deposit – the lower the percentage of the property’s value you need to borrow (known as the loan-to-value or LTV) the lower the interest rate you’re likely to get.
You will normally pay an arrangement fee to the lender of 1-2% of the loan amount along with valuation and legal fees.
As agricultural mortgages can be complex, it can take two to three months for the loan to be granted.
How do you get an agricultural mortgage?
Agricultural mortgages are offered by some high street banks, including Barclays, Clydesdale and Yorkshire Banks, NatWest and the Royal Bank of Scotland, and specialist lenders such as Farm & Country Finance and the Agricultural Mortgage Corporation (AMC), which is part of the Lloyds Banking Group.
It’s best to speak to a specialist mortgage broker rather than contacting lenders directly as they can look at the whole available market to find you the best deal and may have access to deals not available directly from lenders. They will also be able to help you through the application process.
It can be trickier to get a mortgage if the property has what is known as an ‘agricultural tie’. This is a restriction on the property that says it can only be occupied by someone who is currently or was last working in agriculture or their widow or widower. This can reduce the value of the property, as there would potentially be fewer buyers interested if the property was sold, and therefore the amount you can borrow.
If the property you want to buy has an agricultural tie it’s even more important to speak to a mortgage broker, as well as if you’ve had previous credit problems.
Alternative finance options
If you’re not able to get a mortgage to buy a farm – because it’s dilapidated for example – a bridging loan is another option to consider.
These are more expensive than mortgages but are designed to be taken out as short-term funding until you are able to pay back the loan and secure longer-term finance. You’ll need to have an exit strategy in place to take one out, which could be to refinance the property with a mortgage once it’s been brought up to a good enough condition.
They also let you raise money a lot more quickly than with a mortgage as the application process is more straightforward.
Pros and cons of agricultural mortgages
Agricultural mortgages are a good-value way to fund the purchase or refinance of a farm or farmland but the application process can be lengthy so they are not suitable if you need money fast. Lenders also won’t lend on certain properties.
An agricultural mortgage could be your best option for financing a farm but speak to a specialist mortgage broker to get the best deal. You can also compare commercial mortgage rates here.
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