Recently, the Federal Reserved (Fed) raised interest rates.
Higher interest rates are implemented to reduce the speed of economic growth by making borrowing more difficult. In other words, in the Fed’s opinion, the economy was growing “too fast” so they upped the interest rates to brake this rapid growth. Once they assess that this rapid growth has been sufficiently handled, a lowering of interest rates will be implemented to restore steady economic growth.
Until then, these increased interest rates strongly impact variable rate agricultural loans. When interest rates increase, it naturally follows that agricultural landowners are less likely to apply for farm loans, ranch loans, citrus loans, etc. However, agricultural landowners are not without options during periods of elevated interest rates.
Fixed Rate Ag Loans
Fixed rate ag loans are loans where the interest rate does not rise and fall during the fixed rate period of the loan, allowing the borrower to accurately forecast forthcoming payments. Variable rate loans, on the other hand, are directly impacted by interest rates (also called discount rates) and are thus, not easy to predict.
During periods when interest rates are elevated, ag lending companies typically provide a discount to borrowers to fix their interest rate over time, as rates are more likely to fall during the fixed rate period. Conversely, during periods where interest rates are lower, fixed rate agricultural loans are generally higher than variable rates because interest rates are strongly expected to rise during the fixed rate period.
Therefore, in the current economic climate, it definitely makes sense to consider a fixed rate agricultural loan when assessing your farmland financing options.
To learn more about fixed rate agricultural loans and financing agricultural land, please contact us at Bankers South Lending & Finance at 855 898 BANK.