People call me all the time wondering if they can use a vendor take back mortgage on the purchase of their new home. My knee jerk reaction is NO, but there are exceptions. I did the following video blog explaining why the vendor take back doesn’t work that well.

Enjoy!

I saw a video today that was very interesting and features BNN interviewing Brad McLister, editor of Canadian Mortgage Trends. He does a great job of explaining why 35 year amortizations are not all evil, and what home buyers should be aware of regarding future rates, future payments, and the use of mortgage brokers over their banks.

Take a view of it at:

Click HERE to see the video.

Thanks again for reading!

I get many calls from people in rural areas wanting financing on their farm, and they’ve often been to every bank in town and cannot get any financing beyond 50% of the value of their property.

This is normal in the current economic environment.

Alternatively, a farm owner sees my residential real estate ads for great low rates and calls me only to get angry at me when I tell them they aren’t eligible for this program due to their house being a farm.

In this article, I’m going to cover out why farms are hard to finance, why banks won’t usually get involved in financing farms, and what alternative programs are available for borrowers (including some details of the government backed CALA loan program).

WHY LENDERS ARE HESITANT TO LEND ON A FARM:

The primary reason that banks and private lenders don’t lend on farms is that they nearly impossible to foreclose on. As a lender, if a borrower doesn’t make payments, you can issue a notice of demand, and start the foreclosure process whereby you take over the property in 6 months time, or force a sale to recover the money you loaned to the borrower. In BC, it is around 6-9 months from start to finish, and this is assuming it is a CLEAN foreclosure with no loop-hole jumping, obfuscation by the borrower, and funny business. However, when you try and take someone’s home, you can expect all of the above.

There are special laws in Canada protecting farmers and their rights. If someone is a mechanic, and you foreclose on him and take away his land, he is still a mechanic. If someone is a farmer and you take away his land, you’ve left him destitute with no means of earning an income AND no home. Clearly the courts don’t want to deprive someone of their ability to live AND work, so there are special provisions whereby if a person is raising ANY crops: even just one sheep, or growing one stalk of corn for resale, they can apply for protection under these laws and prevent foreclosure or court ordered sale (or at the very least, make the process drag out forever…)

For this reason, banks are “out” of the farm financing game for the time being. A couple of years ago (basically from 2001 through 2006) getting mortgages on farms (and anything else, for that matter) was far easier. Money was loose, lenders were flush with cash, and times were good. Since the capital markets dried up in late 2008, it’s a new paradigm of lending, and the properties that are tough to finance now are: farms, fractional interest, and limited time use properties. These three types of property represent the greatest challenge for brokers, and many don’t have a clue how to get them done, or what programs even exist.

The second reason that farms are hard to finance is that farms, like most tax payers, write off as many things as possible so as to minimize their tax payments to government. While this makes great sense to the individual at tax time, it makes financing hard. Banks have “debt servicing requirements” which is a fancy way of saying, “proof of income sufficient to make the payments.” They only use net taxable income (line 150 of your Notice of Assessment or T1 General). If you’ve written off all your income so that you have no tax bill, good luck getting financing. You either win at tax office (by paying less tax) or you win at the bank (by getting the lowest rate in town) but you rarely win at both – and if financing a farm, you likely will NOT win at both.

ALTERNATIVE PROGRAMS AVAILABLE FOR FARM MORTGAGES

So, if not the banks, where do you go? If you’ve been to the banks (and ESPECIALLY if you write down your taxable income) you’ve been told “NO” more times than you can count, and they’ve likely made you feel like crap in the process: as if you’re trying to finance something illegal or financially dangerous!

There are three primary sources of financing:

1. Farm Credit

2. CALA Financing

3. Private Lenders

Let’s look at each in turn.

FARM CREDIT

There is a division of the Federal Government, Farm Credit Canada (http://www.fcc-fac.ca/) that assists farms and agricultural business with financing. This program is government run and backed, and provides loans, mortgages, and venture capital. Check out their website if you’d like more information on them. They are NOT available through brokers, and the client has to deal direct.

You can expect a lot of highly specialized and detailed questions about your farm’s output in terms of bushels, bundles, crops, livestock counts, and everything else. If you don’t know these numbers, or are too new to have them in a cohesive business plan, then Farm Credit Canada is not for you. This organization, it’s loans and programs, are more suited to large scale farming enterprises with accurate record keeping and a history and track record of success who are either a.) Looking to expand their product, or b.) Looking for working capital during off seasons.

I personally have had very little success working these programs with borrowers. I, as a broker, have had to stand aside and let the client and Farm Credit deal directly and they cut me out of the process. Therefore, my details regarding Farm Credit are slim. Check out their website and do an application if you think you qualify.

If you are a small single man operation, this isn’t the program for you.

CALA FINANCING

CALA is an acronym for Canadian Agricultural Loans Act. This is a government backed financial program that provides a guarantee to lenders for up to 90% of the loan. This way, if the lender makes a loan, they are 90% covered should the loan go into default and the lender end up in a situation to lose money.

A couple of points regarding these loans:

1. They are available for new and existing farmers (new farmers are those in the business for 6 years or less)

2. They are available for land purchases, livestock purchases, equipment, storage, or just about anything else the farm will require

3. The rate maximum the banks can charge is prime + 1% on a variable and their residential rates + 1% on a fixed rate meaning this is very cheap money!

4. The maximum percentage financing of the farm they can offer (loan to value) is 80% of appraised value or purchase price

5. $500,000 loan maximum for property purchases and $350,000 maximum for everything else

There are a number of exclusions for which these loans cannot be made. For example, “operating lines,” permits, personal vehicles, or construction and improvements to a family dwelling. It must be FARM financing.

These loans are theoretically available through any bank, trust company, credit union, or other financial institution. However, experience has shown that most institutions don’t get involved in this type of lending. I have calls out to Agriculture Canada as well as several institutions and will update this post as soon as I get a firm answer on who is lending under this program. UPDATE UPDATE: I sent an email to the CALA administrators, and they have said that in the last 4 fiscal years only TD Canada Trust and Bank of Montreal have funded mortgages and loans under this program. To their knowledge, no other lender is using the CALA program.

Also, you will not be getting residential mortgage repayment plans. So, you can say goodbye to the 35 year amortized mortgage. Land loans under this program can only be 15 year repayment period, and 10 years for all non land loans. So, you will face some larger payments than you likely expected. There are also some other fees that add up to around 1% that the borrower can be expected to pay to register the loan and get it administered by the government.

For a detailed list of lender guidelines, go to http://www4.agr.gc.ca/resources/prod/doc/prog/cala-lcpa/pdf/cala-lcpa_info_e.pdf and you can read all the fine print about the program.

PRIVATE LENDERS

Private lenders are often overlooked as a source of financing because of their higher rates. Private lenders will typically lend as a 1st mortgage at 6.25% up to 13% (or higher) depending on the level of risk, percentage of the farm’s value borrowed, location of the farm, and credit worthiness of the borrowers. 2nd mortgages are available at rates of 9% to 16% (or higher) depending on the same factors.

Most people read those rates and say, “Well that is just ridiculous. Who would pay those rates?” The answer: a LOT Of people. If the CALA loans are low interest rate, but must be repaid over 10 years versus a higher rate repayable over 25 years, let’s see how it works out assuming a $100,000 1st mortgage.

CALA loans used for plant and equipment (10 year repayment) would have a payment of $1,070 based on a 5.25% interest rate. Also, the money would have to be accounted for, proven to be used for eligible expenses, and all the other rules followed “t’s” crossed and “i’s” dotted.

Private loans at 12% for the same amount over 25 years is $1,054 per month. So, from a cashflow standpoint, it’s basically the same amount, and in this case, slightly less to take the private money. Also, with private money, you simply get a cheque and go spend it on what you want, you likely won’t have to account for it, file expenses, or all that nonesense.

Some private loans are available on interest only terms meaning only the interest has to be paid and the who amount paid some time in the future (perhaps after you’ve built and expanded production and have the higher revenue).

So, there are three different avenues for you to investigate if you are a farmer (or hobby farmer) looking for financing. If you want details specific to your situation, don’t hesitate to give me a call at 604-657-6775 (my direct cell) and I’ll see what we can work out for you.

Thanks again for reading!

I get calls and questions on this topic almost every week. Given the changing market, it’s time for an update as of November 15th, 2009.

In fact, I recently took a call from a real estate lawyer who was buying a place and wanted my opinion on this topic, and I went into great length as to what I thought. In the end, she ended up taking variable, and in this market, I think this is the right move, for her. Here is why:

I have written several strong articles in favour of fixed mortgages in the past. For me, personally, I just like them. Period. It’s the way I work. I want to know what my payment is going to be for the next 5 years and I don’t want anyone telling me otherwise.

Could I save money if I took a variable. Probably, but I don’t care. If you are considering fixed or variable rate mortgages there are three things you need to think about three specific questions:

1. What are the current rate offerings ?
2. What is your income and employment situation?
3. What is the reason you are buying the property?

WHAT ARE THE CURRENT RATE OFFERINGS?

Previously, when I was arguing for fixed rates for most clients it was at a time when the 5 year variable and 5 year fixed were nearly on par. This was because the capital markets were forcing banks to set their variable at prime rate PLUS 1.5% or prime rate PLUS 1.0% for a rates that were equal to (or even higher!) than fixed mortgages. In this situation, with prime rate sitting at all time lows, it made no sense to take a variable rate when there was only one way for rates to go (up) and no savings, even on day one, by taking a variable rate mortgage.

If there is no savings by taking a variable rate, why absorb the risk of the rising payment?

Well, capital markets have changed, and there are a few banks offering prime MINUS 0.10% for a net rate of 2.15% versus my best rate on a 5 year fixed of 3.85%. This is a full 1.7% difference, and this market, that is substantial. In other words, prime rate would have to rise from 2.25% up to 3.95% before you break even. With the Bank of Canada pledging to hold rates low until mid 2010 that is about 9 months of a significant savings before we see prime start to move up. If you want to save some money, this is a compelling time to take a variable rate as you can transfer to a fixed rate mortgage at any time, with no penalty.

Based on current offerings from banks, and depending on your own answers to my next two questions, variable looks like the way to go.

WHAT IS YOUR INCOME AND EMPLOYMENT SITUATION?

With a variable rate, you face a variable payment (or a variable amount that goes towards principle – which CAN result in a negatively amortizing mortgage where you owe more at the end of the term than at the beginning, if you don’t pay attention).

So, how are you paid? How often? Are you paid a salary that is set? Do you get bonuses or commissions? Are you self employed with the option of more work if you want it? These are all important things to think about.

If you are paid a salary, and especially if you need to take a variable rate to comfortably afford the property, you need to be very careful if you take a variable. You’ll need to watch interest rates and lock in at the first sniff of rising rates. This is true unless you have a mortgage payment that is very modest when compared to your salary.

If you get bonuses and commissions, do you NEED to earn those bonuses in order to make your payments? What happens if the rates rise (and your payment) and you don’t get the bonus? Will you be ok? Do you have enough “wiggle room” in your budget to absorb a higher payment, or a higher payment along with lower income?

If you are self employed, how seasoned is your client base? How confident that you can repeat last year’s success? If you are a realtor, chances are you have done very well the last five months, but what about last december through march? If your income is seasonal, or varies dramatically, do you also want a variable payment?

The bottom line is to look hard and dispassionately at your income pattern. If you have a lot of  “wiggle room” to absorb a rising payment, or if your budget is sufficiently comfortable, then you can take a variable and enjoy the savings.

However, if you NEED that variable rate to afford your payment, you should not be taking it and not buying the property. People are, by their nature, myopic, and they only look at the recent past. If rates rise, are you going to be ok?

WHAT IS THE REASON YOU ARE BUYING THE PROPERTY?

This is often overlooked. People get so hung up on fixed versus variable discussions that they forget why they are buying the property. If you are buying a rental / investment property, then you likely are thinking all about cash flow. If this is the case, variable may be the way to go. If you are buying your own home, and you intend to live in it for a while (5+ years, for example) then you may want a fixed rate so you can rest assured your housing payment won’t increase.

Or maybe not.

There are lots of other reasons, and here are a few: Maybe you’d prefer to buy your house and you want to save every penny, so you plan on taking variable and watching rates like a hawk to try and capture the most savings possible. Personally, as someone IN the industry, I think this is madness unless you happen to enjoy watching interest rate and bond moves (perversely, I do, and you should take advantage of this).

Or maybe not.

Maybe you are buying a property that is a “holding property” and you simply want to minimize your carrying costs until you subdivide it, or until the subdivision or city plan reaches your property and you sell. Variable might be a good choice here as your exit plan is relatively assured and timeline clear. With savings available on variable in the short term, this might be the way to go.

Or maybe not.

Maybe you have a lot of “wiggle room” in your budget, but are so busy you don’t feel like watching rates all the time, and heck, if rates rise a point or two it won’t be the end of your financial world. Variable might be the way to go here.

Or maybe not.

Maybe you are doing an equity take out to invest, and with rates so low you want to lock in now at the fixed rates because you don’t believe they’ll be back any time soon. You plan on investing the money, and you want to know what your “cost of capital” is so you can monitor if your investments are outperforming your debt to buy them. In this case, fixed rates are likely for you.

Or maybe not…

IN SUMMARY

As you can see, a lot of the decision is very personal, and based entirely on features of your own unique financial situation and personality makeup.

There is no rule of thumb. Brokers that drone on and on that “variable is always best” are likely getting angry calls from their clients they put in variable mortgages 6 months ago when rates were prime + 1% and are now Prime – 0.10%. Good. That’s the way it should be. Advice is only as good as the person giving it, and if they don’t take the time to look at your unique situation of income, risk tolerance, budget, and property type, then they aren’t doing their job and you should be speaking to someone like me instead.

Until next time, happy house hunting!