Kieran Coughlan: Protecting your farm loans from soaring interest rates
For a farmer with a €250,000 land loan with 12 years to run, an interest rate rise of 3% would see monthly repayments go from €2,081 to €2,452.
The ECB interest rates have rocketed up over recent months from the lending rate of 0% about nine months ago to 3.5% as of March 22.
Annual inflation is running at 6.9%. This is far above the ECB’s long-term target of 2% and commentary from the ECB has suggested it will keep increasing lending rates until inflation rates are brought into line with expectations.
The increase in interest rates at both European and global levels has already had ramifications, most notably the difficulties experienced by Silicon Valley Bank and Credit Suisse.
From a consumer perspective, it is welcome that there may be some tempering in the rate of increase in interest rates as collateral damage is becoming apparent. Closer to home, the increase in interest rates is already being felt by tracker mortgage customers.
For a tracker mortgage holder with €200,000 left to repay over a term of 20 years, the increase in interest rates will have translated into an increase in monthly repayments of €338, or put another way a whopping €4,055 per annum as a result of the changes over the past nine months, and the expectation is that the interest rate rises might not yet have finished.
For the typical profile of a couple who bought a house in the boom at relatively high prices, some 15 years on they are now being hit with a severe increase in mortgage repayments just at a point when they are also facing significantly increased personal living costs where children are either side of mid-teenage years.
This cohort of bank customer is hardly the root cause of inflation, yet these are the people being penalised most severely in the form of heavy interest rate increases, not to mind cost-of-living increases.
For farmers, the increase in interest rates is being applied similarly to tracker mortgages in respect of some loans where the terms of the loan were spelled out as being linked to the ECB rate plus a margin whilst the interest rate increases are being applied, with more discretion in relation to more general lending.
Nonetheless, there is interest rate creep happening both in respect of existing non-fixed loans and more especially in relation to new loans. For a farmer with a €250,000 land loan with 12 years to run, an interest rate rise of 3% would see monthly repayments go from €2,081 to €2,452.
Rising repayments at a time when the profit margins from farming seem to be firmly in reverse can result in an uncomfortable squeeze similar to middle-aged middle-income people.
So what action can be taken? Firstly if one has farm borrowings it is well worth digging out the loan offer letter or agreement with a view to looking up the terms of the agreement. If you find the paperwork a bit on the double-dutch side, you can either ask your accountant/adviser or indeed your banking relationship manager to explain whether ECB interest rate rises are directly going to feed into rate rises for you.
A quick review of your monthly repayments or loan statements will certainly jog your memory and will give you an indication that the monthly repayments are rising in sync with the announced ECB rate increases. Where you are concerned that an increase in repayments might coincide with a drop in income, it is worthwhile doing up a financial plan to see whether ends will meet or whether action needs to be taken.
The financial plan need be no more than a summary of incomings and outgoings for the remainder of the year. Acting in time means the choices you make will be yours, acting too late means others make the choices for you.
Options available could include a restructuring of the loan, either varying the terms of the loan such a spreading the loan over a longer period, switching to fixed interest rates in order to give surety on the repayment levels or deferring/pausing payments to give you some breathing room.
Pausing can mean different things. Pausing is useful where the term of the loan is extended but sometimes pausing can mean your repayments increase where the lender expects you to fulfil the loan with no change to the end date, ie within the original term. Changing the loan terms multiple times is not welcomed by lenders either and the advice is therefore to make one overall adjustment if possible to realistic and sustainable result.
Outside of varying the repayments themselves, perhaps a restructuring of one’s overall business could provide the financial ticket to extract oneself from difficulties.
This could include a sale of surplus underused machinery or non-productive stock. As the number of lenders in the Irish market has shrunk significantly over the past decade, it is more important than ever to try and maintain one’s credit rating.
A slip in meeting one’s financial commitments can lead to one becoming locked out of access to credit quite quickly from other lenders should your relationship deteriorate with your existing financial partner, and critically renewal of stocking loans, credit lines and overdraft finance, which are typically renewed on a yearly basis, can be withdrawn.
If you do wish to restructure a loan, find out in advance whether the restructure will affect your credit rating. Finding oneself in a financial squeeze is, to say the least, an uncomfortable position.
If Silicon Valley Bank and Credit Suisse can get caught on the wrong side of a squeeze it is not implausible that some farmers will too. By identifying that such an issue could be on the horizon, by having a plan to tackle it as best one can, and by being upfront with your lender, the prospects of a credit squeeze undermining the sustainability of your business are much reduced.
People should obtain professional advice relevant to their own specific circumstances.
