A discussion of macro and microeconomic factors that influence the direction of land loan rates. What do rising rates mean for the buyers and sellers in the land market.
First South Farm Credit (FSFC) has been financing rural land since 1916. Currently, FSFC has over 40 office locations serving the “Deep South” in Alabama, Louisiana, and Mississippi.
As an affiliate of the national Farm Credit System, a network of borrower-owned lending institutions, First South Farm Credit specializes in providing credit for farming operations that include crops, livestock, land, and timber. We are also chartered to help with financing “lifestyle farms, rural home sites, or rural land tracts for enjoyment or investment purposes.”
Right now, the economy is doing well, the overall market is strong, and consumer optimism is holding. Unemployment has dropped, the Gross Domestic Product (GDP) is rising and inflation is low. Still, potential buyers need to be aware that we are in a rising rate environment and that, while interest rates aren’t at rock bottom, they are still very near historic lows. The recent uptick in interest rates makes lending money a little more expensive but even so, rates are lower than they have been in a long time.
There is an inverse relationship between interest rates and buying power and how far your finance dollar will take you in terms of purchasing acreage. The lower the land loan rates the more buying power you have and the larger piece of property you could acquire for the money you have to invest. Conversely, when interest rates increase buying power goes down.
Indications are that people are feeling comfortable enough with the economy that they may be willing to spend money where they may not have in the past and that includes investing in land. Adding to that confidence is the fact that land values have held very steady over the past decade.
Since we borrow our money from a parent bank (who provides funds to us from the issuance of agricultural bonds), FSFC interest rates are similar to that of treasury bonds.
We have the ability to go long term on our land loans out to 30 years with options for just about everything in between, depending on the needs of our customers.
We have seen a movement in the past five years towards longer-term land loans. The reality is that land loan rates and home rates are different. A 30 year fixed interest rate on a home may be in the 5.00% range at this time but borrowers are not going to get that rate for a 30 year fixed land loan.
Currently, a lot of borrowers want to buy property with the intent of building a house in a few years and then refinance. While we can set them up on a 30-year land loan, it makes no sense for a borrower to pay more interest than they have to if they are going to refinance in the near future.
What we can do is provide a balloon loan with a five year fixed rate. The customer has the flexibility of a lower rate and monthly payment and, in a few years they can roll a construction loan into a home mortgage loan that includes some or all of the land. If circumstances don’t allow the customer to build as planned by the five-year maturity date, we can renew the loan and fix it for another five years (provided all credit requirements remain strong).
Financing Terms and Interest Loan Rates
I am often asked whether financing terms and interest rates differ depending on property types and sizes. And, the answer is yes…and no.
Land loans (and all loans for that matter) are evaluated in terms of risk. A lender has to consider the ramifications of what they will be faced with if the borrower’s situation changes and the lender has to take ownership of the property. As a result, the interest rate, length of the loan, and down payment are all products of this evaluation and enable the lender to mitigate some degree of risk.
“Land is not depreciating and as they say “they are not making any more of it”.”
For credit qualified borrowers, a typical down payment for a land loan is 15-20%. The down payment can come in the form of cash on hand, cash, and equity, or equity in other real estates which is owned and pledged.
Clear cut land that hasn’t been replanted and is in rough shape or land with flood plain on it is going to be a more risky proposition for the lender than an established timberland, good open pasture or even residential land that is more developable and marketable. As a result, the more risky proposition may require a greater down payment than the typical 15-20%.
For example, a clear cut property is different than a commercial plantation in that a young commercial plantation is usually managed and growing in value versus a clear cut that is going to be naturally regenerated and could potentially go backward.
Factors such as these are often taken into account when establishing the required down payment. If an additional risk is perceived, it may result in requiring a down payment in the 30% range (or higher).
The bottom line is that you can still get a return on investment on a piece of land even if it doesn’t have a means of producing income from crops and/or timber. Land is not depreciating and as they say “they are not making any more of it”. So historically, provided you do not overpay at the time of purchase, land has been a relatively safe investment and asset.
What About Land Parcel Size?
First South Farm Credit has the ability to finance as little as one acre and up. For smaller parcels that are below five acres, we can handle them through our Rural Home or Home Site Program. There are some conditions and requirements for these loans, but they aren’t excessive or unreasonable.
Anything 10 acres or larger is our bread and butter and are very easy to finance. These loans are handled through our rural land program and require the standard 15-20% down payment and have terms up to 30 years.
Overall, when it comes to financing different track sizes it is the same general process and procedure whether you buy 10 acres or 100 acres plus, although for the larger parcels, there are a few extra steps involved. One key difference is, depending on the size of the land loan, an appraisal may be required. If there is a sizeable value of timber on the property, a timber cruise may be utilized.
Equipment or Land Improvement Financing
First South Farm Credit can also handle equipment financing. If you are looking to finance equipment, the loan term depends on whether it is used or new. Normally, financing used equipment has a window period of around five years largely due to depreciation while new equipment terms can go up to seven years.
What Makes First South Farm Credit Different?
In addition to our extensive experience in agricultural and land financing, one thing that sets First South Farm Credit apart from other lenders is that we are a cooperative. When you borrow money from us, you become a member and that means you own part of the business. That ownership entitles you to share in the profits through our Patronage Refund Payment Program.
In other words, we give our customers/owners, money back. While we can’t guarantee payments back to you or the exact rate of return, as long as we remain profitable and well capitalized, we are committed to sharing our profits – as evidenced by our patronage payments for the past 23 consecutive years!
So, if land ownership or refinancing your land is what’s next in your story, let First South guide you through financing the next chapter! Visit our website at firstsouthland.com to find a location nearest you, or you can give us a call at 205-970-6030 and Lets’ talk!