Farm borrowing in the UK

Farm borrowing in the UK has doubled in the last decade and at the end of October 2015 stood at £17.7bn but with interest rates at historically low levels, is now the moment to consider fixing rates for at least some of your long term borrowing?

This is a notoriously difficult question to answer and one on which I am not qualified to advise but what is for certain is that the long term fixed rates which are currently on offer are well below anything I have seen in my 25 year career.

Having said that, those borrowers who have stuck with variable rate loans over the last 6 or 7 years will have generally fared better than those on fixed rate loans. This is because base rates have remained fixed at 0.5 % since 2009 then fallen to 0.25% in the wake of the BREXIT referendum and while there is still potential that rates could fall further one may question why one should consider fixing one’s borrowing at all.

Well, the primary advantage of fixing rates is that you “know where you are” in terms of repayments over the fixed term of the loan. To some borrowers this is a great comfort for budgeting purposes and it outweighs the higher interest rates that are usually charged for fixed rather than variable rate loans at any one time.

However, one cannot help feeling that if a business cannot afford the low rates that are currently being offered on fixed rate loans then the business should perhaps not be borrowing the money in the first place.

Indeed it seems we are in uncharted economic waters and with interest rates and inflation remaining low, this means that the value of any money that is borrowed today will not be eroded in real terms by the effects of inflation as it was in the 1970s and 80s for example. Therefore currently, it is not so much the interest payments but the capital repayments that represent the most significant element of repaying one’s debt.

But, this era of low interest rates and low inflation may not last forever and one may rue the day that one did not take advantage of the long term fixed rates currently on offer. 

Therefore now maybe a good moment to consult your financial advisor to see what offers are out there, whether that be borrowing from one of the High Street Banks or specialist agricultural lending institutions such as the Agricultural Mortgage Corporation.

Finally whatever decision you do make you must be sure to understand the terms of your loan and in particular where fixed rate loans are concerned you need to appreciate the potential redemption charges that may apply if you want to repay a loan early.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

Farm borrowings increase by almost 9%

Latest figures released by the Bank of England indicate that Farm borrowings have increased by almost 9% in the year to April 2014, reaching a new record high of £15.2bn. Farm borrowing has also risen in the last two year; by 10% to April 2012 and 9% to April 2013.

The question is whether this is a sign of a sector under pressure causing cash flow difficulties or whether it is a sign of confidence giving rise to new investment; my guess is that it is a bit of both.

Livestock farmers, particularly beef fattening units, will be struggling at present and they may well find their finances are being stretched as beef prices have plummeted in recent months. These farmers will be increasing their level of indebtedness because of the difficult market.

On the other hand many dairy farmers, who have seen good milk prices over the last year, may be investing in their farms with cautious confidence in the future.

There is no doubt we are seeing a lot of interest from farmers who are looking to borrow money to purchase land. However, the problem is that land is changing hands at prices of up to £10,000 per acre or more and even at historically low interest rates, the annual cost per acre of this borrowing can be eye-watering and it is significantly higher than the rental value of the land.

As a general rule banks are keen to lend money to farmers, not least because the value of agricultural land has more than doubled since 2007. However they are also very conscious that borrowings must be affordable and this is often the stumbling block for some farmers who may be capital asset rich but whose profits may be very modest indeed.

Having said that, there are some very good lending rates available in the market at present. For example the specialist “farmer’s” bank, the Agricultural Mortgage Corporation (AMC) is currently offering 0.8% off their standard lending rates for certain qualifying capital investments on farms.

The AMC is able to fund this discount because of money they have secured from the European Investment Bank. The idea is to encourage farmers to develop farm improvement projects, examples of which include new or improved crop storage and processing facilities, livestock housing, parlours, farm shops and other diversifications as well as wind turbines and solar panels.

If anyone is interested in looking at the availability of this funding for a project they may have in mind they are invited to contact me for free initial advice.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk