If you are farm shopping, you should definitely look at the CALA loans. CALA stands for the Canadian Agricultural Loans Act. The program is a loan guarantee program by the Canadian federal government. Farmers can use these loans to establish, improve, and develop their farm business. The CALA loans are a great option if you are starting out and trying to buy your first farm.
Full disclosure, my partner and I bought our farm using a CALA loan. We found it to be the best option for us. Since CALA is not widely advertised (let’s face it, it’s not a big moneymaker for the banks), I thought I would take the time to walk you through what CALA is, who can get a loan and some tips and tricks to consider. Agricultural cooperatives are also eligible but I will not focus on this.
Under the CALA, the federal government guarantees, to the lender, repayment of 95% of a net loss on an eligible loan issued. This means that if you are stretching your farm budget a bit, the bank might be more willing to listen. Click here to find out how to calculate your budget if you haven’t already done so.
The maximum aggregate loan limit for any single farm operation is $500,000. Loans are limited to a maximum of:
- $500,000 for the purchase of land and the construction or improvement of buildings
- $350,000 for all other loan purposes, including consolidation/refinancing
What this means is that you can propose a combination of financing for a farm and some equipment as long as the total amount is under $500,000. For example, if you would like to buy a farm for $400,000, you could still get an additional $100,000 to modify the barn for your choice of livestock. The total amount of the loan can not exceed $500,000.
You will still need the normal downpayment amounts which will vary somewhat depending on what you want to get the loan for but generally speaking, you need 20% for a downpayment. For a farm purchase, the maximum you can get a CALA loan for is 80% of the appraised value. As a buyer, you will have to pay for the appraisal but you could get a portion of it covered under one of the CALA options.
You can apply if you are one of the following:
- existing farmers
- beginning farmers (which CALA defines as less than 6 years of farming)
- start-up farmers
- farmers taking over the family farm
- part-time farmers
If you are a beginning or a start-up farmer, you will need to provide the lender with a business plan and an income tax form showing no farm income and/or expense for at least one year in the last six years. This is one of the few programs where you can apply as a new farm business and not need to provide years of great financial results. If you have been farming for over 6 years, you will need good financials.
Acceptable farming activities include:
- Growing field-grown crops, cultivated and uncultivated, and horticultural crops
- Raising livestock, poultry, and fur-bearing animals
- Producing eggs, milk, honey, maple syrup, tobacco, fibre, wood from woodlots, and fodder crops
The CALA loans give you the option of a wide range of purchases. Under the $500,000 limit your options include:
- Buy land
- Build, repair, remodel or add on to any building or structure on a farm
- Purchasing, moving and installing on a farm a complete or partially complete structure and, if necessary, the completion of the installed structures
In the other loan purposes category which has a limit of $350,000, you have the option of:
- Purchase, installation, alteration, major overhaul, or major repair to or of:
- tools, implements, and machines that can be removed again
- Electricity generating machinery
- Livestock purchases for breeding purposes including:
- horses and other equines
- cattle, sheep, goats and other ruminants
- swine, poultry, bees and fur-bearing animals
- Fencing or drainage including repairs or overhaul of fencing where the cost is $2,000 or more
- Clearing, breaking, irrigating and reclaiming of land
- Conservation of soil, prevention of soil erosion by the planting of trees and shelterbelts
- Purchase and the planting of trees for syrup production, fruit trees, Christmas trees, and ginseng, where the cost is $2,000 or more
- Build a road or driveway on a farm
- Land transfer tax, survey, appraisal and legal costs relating to the purchase of additional land (not always offered by the lender)
- Purchase shares for inter-generational farm transfers
- Consolidation/refinancing of loans
The list of ineligible expenses is fairly short and limited to:
- Improvements, upgrades or any other work to the house
- Quota purchases of any kind
- Operating loans
- Loans for the purchase of short term feeder livestock
- Consolidation of a lender’s ordinary loans
The Fine Print
You can apply for a CALA loan with pretty much any bank or credit union that already offers mortgages. Chances are you will have to ask explicitly for a CALA loan, the banks are not keen on making this your first option. You should be prepared to talk to the small business lending division. I’ve been told by more than one lender that they don’t consider anything under $750,000 to be worth the time of their agricultural department.
The cool thing about CALA is that there are maximum interest rates! If you pick a variable rate, the interest rate is a maximum of the lender’s prime rate plus 1%. If you buy a farm and have a fixed term rate, the rate is a maximum of the lender’s residential mortgage rate for a comparable term, plus 1%. This is especially good if you are just starting out because you can get a fairly decent rate.
The downside is the repayment terms. There are maximum repayment terms which are 15 years for land purchases and 10 years for all other purposes. Most lenders can amortize loans for longer than 15 years provided a balloon payment is scheduled for the loan at the end of the 15 year period. You can then refinance the remaining loan amount under CALA for another 10 years. We were able to get the payments for a 25-year term but at the end of 15 years, we will have to completely refinance.
The registration fee is 0.85% of the amount of the loan. The administration fee is capped at 0.25% of the amount of the loan (to a maximum of $250) for loans under $250,000. The administration fee is capped at 0.1% of the amount of the loan over $250,000. Overall, your fees will likely be fairly low when applying for a CALA loan.
CALA loans are a great option for you if you are a first-time farm buyer and potentially do not have the financial history of an on-going farm business. Most major banks and credit unions offer this type of loan (full information here), chances are you will have to ask for it.
You can find the bank’s prime interest rate easily online as well as their conventional mortgage rate. Once you have this information, you can use it to make your budget as accurate as possible. It also gives you the ability to do longer-term planning as you know that the interest rate will not increase more rapidly than the prime rate. Your payments might also be slightly lower as you will have a rate close to the rate for a normal house mortgage.
If you have been farming for less than 6 years, I definitely recommend asking about a CALA loan for your farm business expansion or to purchase your first property. You will need to present a solid business plan and your off-farm income will be taken into consideration but you might get approved at a more favourable rate than other loan offers.