Mortgage brokers offer home loans (i.e., mortgages) for rural properties. However, rural properties are more imposed to limit lending to borrowers for such investments. In most cases, mortgage brokers will only finance rural properties with no more than 10-15 hectares (ha) of land. The reason behind mortgage brokers’ restrictions on rural properties is the ability to resale if a borrower defaults. Only a few investors may be interested in rural properties, making security behind the loan risky for lenders. Below is the risk analysis behind rural home loans and what borrowers can expect from lenders.
Purpose. Borrowers will either use a rural property as a hobby farm or commercial farming. Hobby farms are primarily used as a residential property that acts as a recreational lifestyle for the borrower to raise personal livestock or grow an extensive garden or crops of sorts for no significant financial gain. Commercial farming is used as an income-producing asset. On the one hand, with hobby farms, the property appraisal is solely on the land and buildings. On the other hand, commercial farming adds value to the property with accumulated machinery and cash crops. Regardless of the purpose, it is still difficult for lenders to resale the property, given the limited buyers or investors for rural properties. Often, lenders will have to discount the property for it to sell, which may cause the borrower to pay back the difference.
Criteria. Lenders will typically consider these four aspects before funding a rural home loan: location, accessibility, public services, and area zoning. Regarding location, lenders will not approve a rural home loan outside their service area. Perhaps the rural property is an underdeveloped service area, meaning accessibility to the location is not convenient or appropriate for traditional travel methods, and lenders will not be in favour of undeveloped roads leading to the property. The rural property should also be self-sustaining to which public services, such as electricity, water, and sewage, are already installed for lenders to be interested. Lastly, area zoning will limit the lender’s ability to market the rural property to widespread potential investors in the instance that the borrower defaults.
Borrowing limits. If a rural home loan is approved for a borrower, they can expect to be allowed to borrow up to 95% of the property value on land sizes up to 10 ha. When the rural home is up to 50 ha and close to a dense centre, the borrower may be able to loan up to 90% of the property value. Otherwise, lenders may only provide up to 80% in funding for rural property sizes of 50-100 ha. Lenders will likely not approve rural home loans for properties greater than 100 ha, as they are seen as income-producing. Then, the borrower would need to apply for a commercial farm loan that only covers a maximum of 60% of the property value.