Farm and Agricultural Mortgages Explained

Agricultural mortgages (sometimes called farm mortgages) are a specific type of loan used to buy or refinance agricultural land and/or associated buildings.

In this article, we’ll explain the variety of purposes for agricultural mortgages, the eligibility criteria, and why speaking to an expert agricultural mortgage broker is the best route to a successful application.

What are agricultural mortgages and how do they work?

Agricultural mortgages work much like regular commercial mortgages in that they can finance a purchase or release equity.

However, they are restricted to certain types of land or buildings:

• Working farms
• Farm homes
• Farms run as a ‘lifestyle business’
• Other rural businesses
• Land or property used for equine businesses (ie stables, livery yards)
• Renewable energy sites
• Country estates

Fixed and variable rates are available. Which is best for you will be determined by your individual circumstances.

It’s not uncommon for farmland to come with an agricultural tie. This type of covenant often includes restrictions on what activities can take place on the land or occupancy stipulations (e.g., the applicant must be employed in an agriculture-related job).

It’s important to check for any ties and inform your lender from the outset to avoid complications later.

How much your mortgage will cost

Eligibility criteria

As with all types of commercial mortgages, lenders consider several factors when deciding whether to approve an application.

These include:

• Industry experience: An established farmer looking to invest in an already successful business through diversification can expect to have plenty of borrowing options and access to the best rates. With that said, there are products specifically aimed at rural start-ups, but rates are typically higher.
• Business finances: Many lenders will want to see the last three years of accounts when assessing affordability. If these are healthy and your projections are positive, once again, you are more likely to be approved and to get the best rates. If you have been trading for less than three years or seek funds to consolidate other debts and get your business back on track, there may still be borrowing options, but you should seek specialist advice.
• Credit file: While the loan’s affordability will be based on the business’s earnings before interest, tax, depreciation, and amortisation (EBITDA), some lenders will want to view your personal credit file as part of the application process.
• Size of loan: Most providers have a minimum amount of £25,000. Upper limits will vary amongst different lenders.
• Type of property: The property offered as a security can make a difference, not just the property you are buying. Non-standard constructions, whilst quite common on agricultural land, are considered more risky, which will often be reflected in a higher interest rate.

Deposit requirements

Most lenders offer a maximum loan-to-value (LTV) of 70%. This means you will need a deposit of 30% or more to get approved. However, this does not need to be a cash deposit. If you are refinancing, you can use equity in your property or other assets. You might use cash, assets or a combination of the two for purchases. A larger deposit will lessen the risk for lenders and may result in a lower rate.

There are lenders who will loan up to 100% if you have sufficient assets or other collateral to put up as security.

What interest rate to expect

Rates for this type of lending tend to be around 2% above the Bank of England base rate. However, the rate you are offered will be largely determined by your ability to sell your proposal to the mortgage provider.

Commercial mortgage rates are typically higher than those for residential properties, but commercial mortgages are assessed differently.

While each lender has their own attitude to risk, commercial mortgages are often more of a negotiation than a straightforward application process. Essentially, lenders (particularly specialist lenders) understand the risks but are willing to be convinced that your agricultural business will be a success.

How to get an agricultural mortgage

Getting approved for an agricultural mortgage and ensuring that you don’t pay over the odds requires planning and preparation.

Follow these steps to get your maximum mortgage at the minimum rate possible:

1. Do the maths: Work out how much you need to borrow (including all associated costs) and where you are going to source your deposit. This could be from working capital, outside investment, assets or other options available to you. You will also need to consider the tax implications of the way you structure your loan.
2. Write a comprehensive business plan: This is the document you will use to convince lenders that lending to you is a safe risk. Your figures should be realistic, and you will need to ensure the plan addresses any potential challenges or questions, as providers will look at every detail.
3. Speak to an agricultural mortgage broker: This is a niche market and comparing deals is not as easy as it might be with other areas of lending. A specialist broker will be able to find the right lender according to your circumstances and judge whether any offer you receive is competitive.

Make an enquiry to get started with a broker who specialises in agricultural mortgages today.

Which lenders offer farm mortgages?

Both high street lenders and specialist providers will lend money for agricultural or rural purposes.

High street names include:

• Halifax
• Natwest (maximum LTV of 50%)
• Barclays (depending on the wording of any agricultural ties)

There are also many niche lenders, some of whom specialise in this type of loan and have a deep knowledge of the lending environment. In some circumstances, these providers are more open to negotiation.

Alternative finance options

Other options are available if you can’t or don’t want to take out an agricultural mortgage.

You could consider commercial bridging finance if you are buying agricultural property or buildings to sell.

Commercial loans are another avenue worth exploring, depending on how much capital you need for renovation, redevelopment, or diversification.

Finally, if you have enough equity in your home, you could potentially release this capital via a remortgage to help fund your agricultural purchase.

Get matched with an agricultural mortgage broker

Agricultural mortgage applications can live or die by your ability to negotiate. As with any form of negotiation, going into it armed with knowledge is the only way to get the best deal.

Unfortunately, in such a niche area of lending, it’s rare that borrowers have a comprehensive understanding of all facets of the lending process. A whole-of-market broker with agricultural industry experience and a network of contacts will find the right deal and can intervene to help you get it over the line if necessary.

Our unique broker-matching service will assess your circumstances and match you with a broker who has experience securing the best deal for people in your situation.

To get matched with your ideal agricultural broker, call today on 0330 818 7026 or enquire online.