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With interest rates on the rise, is it time to lock in?

Variable rates have been a winner for decades, but a fixed rate is an option worth considering

Is it time to lock into a fixed long-term mortgage?

“Since 1975, the majority of the time the variable interest rate has been the better option and has saved producers money,” said provincial farm financial specialist Rick Dehod.

However, the Bank of Canada recently increased its prime rate by a quarter of a percentage point to 0.75 per cent, prompting charter banks to hike their prime rates to 2.95 per cent. Bank prime rates have not exceeded 3.0 per cent since Jan. 22, 2009, and posted five-year mortgage rates have not exceeded 5.0 per cent since March 2014, said Dehod.

“We’re seeing that the world’s central banks are reviewing their interest rate policies,” he said. “Economists feel that the Bank of Canada’s move signals a turning point to a longer-term trend in rising interest rates, and we could see a slow climb in interest rates over the next 18 months.”

Overall, Alberta farmers have a strong balance sheet, he said.

“In 2016, an average Alberta farm had assets of $3,988,598 with total liabilities of $507,003 for a net worth of $3,481,595 or 87.2 per cent,” said Dehod. “However, equity doesn’t make interest payments — profits do. A one-quarter of a per cent interest change — if all interest was based on prime — would see an additional $1,267 cost to that farm. But not all debt is variable.”

Outstanding farm debt in Alberta has grown from $15.890 million in 2012 to $21.322 million last year, he noted.

“Many beginning farmers have incurred debt to finance entrance into the business of farming or expansion. Their debt loads are much larger than the average Alberta farmer and are subject to some financial risk should interest rates rise. The increase in debt has followed the increase in farmland values.”

The majority of farm managers have chosen the variable-rate term on their mortgages or a one-year fixed term in the past.

“Going forward, as mortgages are reviewed, a five-year fixed term should be part of the discussion. Mind you, peace of mind comes at a price as five-year fixed mortgages are presently posted at 2.0 per cent higher than prime.”

However, that could change quickly, said Dehod.

“Changes in Canada’s and the world’s economies will drive variable rates higher. A fixed rate will give the borrower certainty in their interest costs, and that certainly is worth something to those who have a higher debt load. A small premium on fixed rate mortgages could represent inexpensive protection to an interest rate increase into the future.”

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