Mitigate risk now with fixed rate loans

Speculation about a possible Bank of Canada interest rate cut later this year has pressured fixed rates down, which is good news for farmers.

“I do think it’s a great opportunity to lock in rates and establish a bit of certainty going forward,” says J.P. Gervais, Farm Credit Canada’s vice-president and chief agricultural economist.

“That’s an excellent opportunity for people... because it limits their risk,” adds Lance Stockbrugger, a farmer and chartered accountant.

Don't wait

The spread between variable versus fixed interest rates has shrunk to the point that fixed and variable are really close, Gervais says.

Waiting for the Bank of Canada to come through with a rate cut could result in lower variable rates. However, that action comes at the risk of no central bank policy change coming to fruition, and possibly even rates going up.

“The question to me is not, 'what is the cheapest rate out there,' but, 'what’s the price for me to mitigate risk of seeing rates move up?'” Gervais says. “Right now the price to lock in and mitigate that financial risk is pretty low.”

Certainty

Stockbrugger stresses that lower fixed rates shouldn’t be ignored.

“In the economic environment we’re in, (further) decreases are going to be hard to come by,” Stockbrugger says.

Both he and Gervais point out current fixed rates are giving farmers longer-term certainty about their interest expenses.

“Whereas if it’s floating and interest rates go up, your cash flow requirements are going to be higher each year,” Stockbrugger says.

Budgeting

Certainty also allows farmers to better budget, making them able to plan their spending around what they’ve got committed to cover interest and pay down debt.

Locking in interest rates on long-term debt provides certainty about interest rate expenses and makes budgeting easier. Tweet this

“It’s just going to be so much easier for planning, both capital purchases and day-to-day cash flow,” Stockbrugger says.

As a portion of farmers’ debt will always be variable as it comprises their operating loans, Stockbrugger advises long-term debt on capital like land and equipment is where farmers should seriously look at locking-in interest rates.

Heavily leveraged

A lot of borrowed money is on the line, as Statistics Canada recently reported Canadian farm debt has reached a record $106 billion.

Interest expenses reached $593 million in 2018, a 19.5 per cent gain on the year, due to higher debt and higher interest rates.

Gervais points out that with over $100 billion on the line, even a small change in Bank of Canada rates could have a very large impact, to the tune of hundreds of millions of dollars in interest expenses paid on farms.

Bottom line

The possibility of the Bank of Canada decreasing interest rates later this year means fixed interest rates are down, creating an ideal environment to lock in lower rates. Experts advise seeking the price that best mitigates risk of rising rates, rather than just going with the cheapest rate.

Article by: Richard Kamchen