Mortgage rate direction?

Commodity Marketing

Tools

Mortgage rate direction?

Jul 29, 2020 | 23:58 1 Which direction is the biggest risk for mortgage rates right now?
If the entire system doesn't collapse, and the powers that be lose control of rates, Down or steady would appear to be the only paths possible for a long time yet. I half jokingly suggested to my banker today that mortgage rates might yet go negative, he didn't disagree.

Longer term, much higher rates seem to be inevitable, once reality returns, the risk just doesn't justify the reward at these rates. The trouble is, that argument has been valid for most of my career, but acting on it hasn't exactly been a good business move.

I have one mortgage that came up for renewal this spring, I left it floating waiting for a better opportunity. Was offered 2.39 fixed for 5 years today. Significantly cheaper than floating rate right now. This is the biggest mortgage.

A year ago, and against my better judgement, I locked in a 5 year mortgage, since my crystal ball didn't show Covid yet, and I wasn't certain what would trigger lower rates, or how soon, so I took what looked like a great rate at the time, and it was better than the floating rate. It would take almost a year to break even after paying the penalties to break it.
A third mortgage would take just over a year to break even at the lower rates. But if posted rates drop, the penalty will drop too( only on this one), so I'm inclined to gamble a little longer on this one before breaking it, but pay the penalty right away on the other one.

Which leaves the question, of getting greedy and leaving them float until the next rate cut, or lock them in right away to justify paying the penalties. The higher floating would make the payback on paying the penalties much longer.

Am I nuts to hold out for lower rates in this environment? I definitely want to lock them in within the next year or 2 before either a recovery, or collapse drives rates higher, probably a lot higher in the case of the latter(and it may not matter anyways in that event).

Is anyone seeing cheaper rates anywhere else available on farmland? Reply With Quote
Jul 30, 2020 | 01:50 2 Sounds crazy cheap but rates are going lower

One doesn’t have to worry about rising rates anytime soon. We haven’t seen anything yet. I would Hold out for negative rates where they pay you to borrow money Reply With Quote
Jul 30, 2020 | 07:04 3
Quote Originally Posted by AlbertaFarmer5 View Post
Which direction is the biggest risk for mortgage rates right now?
If the entire system doesn't collapse, and the powers that be lose control of rates, Down or steady would appear to be the only paths possible for a long time yet. I half jokingly suggested to my banker today that mortgage rates might yet go negative, he didn't disagree.

Longer term, much higher rates seem to be inevitable, once reality returns, the risk just doesn't justify the reward at these rates. The trouble is, that argument has been valid for most of my career, but acting on it hasn't exactly been a good business move.

I have one mortgage that came up for renewal this spring, I left it floating waiting for a better opportunity. Was offered 2.39 fixed for 5 years today. Significantly cheaper than floating rate right now. This is the biggest mortgage.

A year ago, and against my better judgement, I locked in a 5 year mortgage, since my crystal ball didn't show Covid yet, and I wasn't certain what would trigger lower rates, or how soon, so I took what looked like a great rate at the time, and it was better than the floating rate. It would take almost a year to break even after paying the penalties to break it.
A third mortgage would take just over a year to break even at the lower rates. But if posted rates drop, the penalty will drop too( only on this one), so I'm inclined to gamble a little longer on this one before breaking it, but pay the penalty right away on the other one.

Which leaves the question, of getting greedy and leaving them float until the next rate cut, or lock them in right away to justify paying the penalties. The higher floating would make the payback on paying the penalties much longer.

Am I nuts to hold out for lower rates in this environment? I definitely want to lock them in within the next year or 2 before either a recovery, or collapse drives rates higher, probably a lot higher in the case of the latter(and it may not matter anyways in that event).

Is anyone seeing cheaper rates anywhere else available on farmland?
We're headed for negative interest. Denmark already has negative interest mortgages. Swiss banks pay negative interest on saving accounts. It's inevitable with a fiat currency. Periodically, central banks can try to push rates higher, but they never get very far without causing cascading defaults and then they throw in the towel. If debtors don't get relief, then the banking system itself begins to collapse. I wouldn't lock in a mortgage rate for more than five years, for sure.

Once rates go negative on a broad scale, where even corporate paper pays negative interest, the economy will be consuming capital at a torrential rate. The collapse of the currency would not be far behind, with a Zimbabwe style inflation the result. Reply With Quote
  • 1 Like


  • Partners's Avatar Jul 30, 2020 | 08:30 4 Not sure on farm land.
    Houses in Humboldt selling like wild fire recently.
    Lowest rate so far 1.94 locked for 5 yrs..
    Machinery 3.2 locked for 5 yrs.. Reply With Quote
    Jul 30, 2020 | 08:35 5
    Quote Originally Posted by Partners View Post
    Not sure on farm land.
    Houses in Humboldt selling like wild fire recently.
    Lowest rate so far 1.94 locked for 5 yrs..
    Machinery 3.2 locked for 5 yrs..
    Who is offering the 1.94 on houses? We actually have residential mortgages on bare farmland to get the better rates. Reply With Quote
    Jul 30, 2020 | 08:38 6
    Quote Originally Posted by Austrian Economics View Post
    We're headed for negative interest. Denmark already has negative interest mortgages. Swiss banks pay negative interest on saving accounts. It's inevitable with a fiat currency. Periodically, central banks can try to push rates higher, but they never get very far without causing cascading defaults and then they throw in the towel. If debtors don't get relief, then the banking system itself begins to collapse. I wouldn't lock in a mortgage rate for more than five years, for sure.

    Once rates go negative on a broad scale, where even corporate paper pays negative interest, the economy will be consuming capital at a torrential rate. The collapse of the currency would not be far behind, with a Zimbabwe style inflation the result.
    But would negative rates translate into negative rates on a mortgage, especially locked in? Sounds like where it has been attempted, actual mortgage rates did not go negative, with Denmark apparently the exception.

    Do you mean you wouldn't lock in for a term longer than 5 years, or you would wait more than five years to lock in a mortgage? Reply With Quote
    Partners's Avatar Jul 30, 2020 | 09:07 7
    Quote Originally Posted by AlbertaFarmer5 View Post
    Who is offering the 1.94 on houses? We actually have residential mortgages on bare farmland to get the better rates.
    RBC..is the place. Reply With Quote
    Jul 30, 2020 | 10:01 8
    Quote Originally Posted by AlbertaFarmer5 View Post
    But would negative rates translate into negative rates on a mortgage, especially locked in? Sounds like where it has been attempted, actual mortgage rates did not go negative, with Denmark apparently the exception.

    Do you mean you wouldn't lock in for a term longer than 5 years, or you would wait more than five years to lock in a mortgage?
    I wouldn't lock in for more than 5 years for sure. Maybe not more than one year. Rates will be going down again once the full impact of the recessions hits. There's little to no reason to expect rising rates for the next several years, so I doubt that any favorable opportunities to lock in a rate will arise. Keep in mind that the other driver of interest rates is business demand for capital. In a recession that goes down.

    It will take time for interest rates to go negative and for a house mortgage to be available on those terms. Short term goes negative first, then gradually the whole yield curve gets dragged down.

    Central banks cannot just sit at a zero overnight rate forever. As debt builds exponentially in a fiat system, debtors need perpetual relief by means of falling rates. If rates don't go negative, then pressure in the financial system just builds until defaults soar and banks fail.

    The restoration of gold as money would arrest this calamity and start the healing process. But there's not much support for honest money these days. Reply With Quote
  • 1 Like


  • Ab7
    Jul 30, 2020 | 12:41 9
    Quote Originally Posted by AlbertaFarmer5 View Post
    Who is offering the 1.94 on houses? We actually have residential mortgages on bare farmland to get the better rates.
    2.64 five year at Afsc Alberta
    Cheaper yet if your a young farmer Reply With Quote
    Jul 30, 2020 | 17:05 10 Doesn't really matter what the rates are if you are a 14000 acre farm and 18 million of debt or a 24,000 acre farm and 40 million of debt.

    Those that get scammed into a lease would have debt over and above mtg debt and at higher rates.

    Interest is a slow bleed that can get of control very fast if not managed properly or the farm is not profitable. Lowering interest rates any further will just drive up prices of certain things. I sort of wished they would have left the rates as is instead of the last change. I am still paying and will enjoy the lower floating rate for the time being.

    As to the opening numbers, just throwing them out there as I don't think anyone in the right mind would have such a level of debt to acre ratio. If they do, then I would be very worried. Reply With Quote
    Jul 30, 2020 | 17:31 11
    Quote Originally Posted by Richard5 View Post
    I am still paying and will enjoy the lower floating rate for the time being.
    What do you define as the time being? Before you lock in?

    My issue is that floating is higher than 5 year. If the market is working that tells us that investors/banks see lower rates going forward. Reply With Quote
    Jul 30, 2020 | 20:05 12
    Quote Originally Posted by Richard5 View Post
    Doesn't really matter what the rates are if you are a 14000 acre farm and 18 million of debt or a 24,000 acre farm and 40 million of debt.

    Those that get scammed into a lease would have debt over and above mtg debt and at higher rates.

    Interest is a slow bleed that can get of control very fast if not managed properly or the farm is not profitable. Lowering interest rates any further will just drive up prices of certain things. I sort of wished they would have left the rates as is instead of the last change. I am still paying and will enjoy the lower floating rate for the time being.

    As to the opening numbers, just throwing them out there as I don't think anyone in the right mind would have such a level of debt to acre ratio. If they do, then I would be very worried.
    $1285 per acre debt and $1666 per acre debt seems like a banker might be asleep at the wheel?

    In your opinion what is an acceptable debt/acre or debt/equity ratio? Reply With Quote
  • 1 Like


  • Jul 30, 2020 | 21:19 13 The 5 yr rates are appealing, but a 10 year at 3.4 sure offers security for a long time. Reply With Quote
    blackpowder's Avatar Jul 31, 2020 | 07:34 14
    Quote Originally Posted by Oliver88 View Post
    $1285 per acre debt and $1666 per acre debt seems like a banker might be asleep at the wheel?

    In your opinion what is an acceptable debt/acre or debt/equity ratio?
    Your banker would be happy to share those ratios. Those numbers would possibly fly here. Reply With Quote
    Jul 31, 2020 | 07:48 15
    Quote Originally Posted by Oliver88 View Post
    $1285 per acre debt and $1666 per acre debt seems like a banker might be asleep at the wheel?

    In your opinion what is an acceptable debt/acre or debt/equity ratio?
    Those things like debt/equity, ROI etc don't matter in farming. Reply With Quote
    Jul 31, 2020 | 08:15 16 There is no doubt that I have missed the cheapest time to borrow money in my farming career.

    Nothing like lazy capital. Land cost inflation/appreciation has taken a bite out of any resources kept to purchase new land.

    If the right opportunity presents itself maybe its not too late..... other than being alot more expensive to purchase the asset(it's cost).

    Schtoopit..... Reply With Quote
    Jul 31, 2020 | 08:24 17
    Quote Originally Posted by farmaholic View Post
    There is no doubt that I have missed the cheapest time to borrow money in my farming career.

    Nothing like lazy capital. Land cost inflation/appreciation has taken a bite out of any resources kept to purchase new land.

    If the right opportunity presents itself maybe its not too late..... other than being alot more expensive to purchase the asset(it's cost).

    Schtoopit.....
    Why are u saving ??

    Better to borrow than to save !

    A kid with zero savings paid 525,000 / quarter this past spring !

    He says he has nothing to loose ! Reply With Quote
    Jul 31, 2020 | 09:08 18
    Quote Originally Posted by wiseguy View Post
    Why are u saving ??

    Better to borrow than to save !

    A kid with zero savings paid 525,000 / quarter this past spring !

    He says he has nothing to loose !
    For:

    The right stuff
    The right place
    The right time

    Otherwise. I don't care.

    The next land I buy might only be a burial plot and then maybe not.

    On a per acre basis burial plots are very very expensive....lol.

    Take care wiseguy. Reply With Quote
  • 1 Like


  • Jul 31, 2020 | 09:09 19 Why are you saving.. Because there comes a time you cant do or dont want all that work,then you become that hated species,,,,the LANDLORD.
    Nice to finaly have a bit of a bankroll in your pocket,instead of a mortage that needs paid. Reply With Quote
  • 2 Likes


  • Jul 31, 2020 | 09:20 20
    Quote Originally Posted by Oliver88 View Post
    $1285 per acre debt and $1666 per acre debt seems like a banker might be asleep at the wheel?

    In your opinion what is an acceptable debt/acre or debt/equity ratio?
    This is what is on my corporate financial statement package.

    Working capital ratio - At least 50%.

    Target goal of debt to equity would be less than 40%

    % owners equity - greater than 70%

    I think all of these measurements depend somewhat on ones age and level of comfort. My accountant tells me that he has a number of clients that farm 1500-3500 acres that consistently put up accrued net income earnings of $125-175 per acre and 8000-10000 acre farms that can't get close to that. That being said, accountant also claims they work with large farms that manage the business very well and profit margins are consistent or even better proving the economies of scale debate.

    Size doesn't always matter, its all management which is a broad term. Imo, its a slippery slope with every increasing technology and sales pitch to drive the latest and the best. Many farms don't have enough annual earnings to support the spending. Its only a matter of time before more and more fall.
    Last edited by Richard5; Jul 31, 2020 at 13:28.
    Reply With Quote
  • 3 Likes


  • Jul 31, 2020 | 10:32 21
    Quote Originally Posted by farmaholic View Post
    For:

    The right stuff
    The right place
    The right time

    Otherwise. I don't care.

    The next land I buy might only be a burial plot and then maybe not.

    On a per acre basis burial plots are very very expensive....lol.

    Take care wiseguy.
    Very, very expensive, but you have to acknowledge that it is, relatively speaking, a lasting investment...

    And one that you will never see depreciate.

    And that's a fact. Reply With Quote
  • 1 Like


  • Jul 31, 2020 | 10:57 22
    Quote Originally Posted by burnt View Post
    Very, very expensive, but you have to acknowledge that it is, relatively speaking, a lasting investment...

    And one that you will never see depreciate.

    And that's a fact.
    With all due respect, I bought land in 1986 and prices fell. Bought land like it in 2004 for same price.
    18 years, for many of those years I wouldn't have been able to sell it for what I paid. Something tells me we might be there again.

    Timing and time better be on your side with a farmland purchase in the past AND now. Reply With Quote
  • 1 Like

    LEP

  • Jul 31, 2020 | 11:26 23
    Quote Originally Posted by farmaholic View Post
    With all due respect, I bought land in 1986 and prices fell. Bought land like it in 2004 for same price.
    18 years, for many of those years I wouldn't have been able to sell it for what I paid. Something tells me we might be there again.

    Timing and time better be on your side with a farmland purchase in the past AND now.
    The reference being directed to your burial plot cost - Reply With Quote
  • 2 Likes


  • Jul 31, 2020 | 12:09 24
    Quote Originally Posted by burnt View Post
    The reference being directed to your burial plot cost -
    LMFAO, now it's funny. Reply With Quote
    Jul 31, 2020 | 12:30 25
    Quote Originally Posted by burnt View Post
    The reference being directed to your burial plot cost -
    Not o sure about your depreciation comment. Have you ever tried to buy or sell a preowned/used burial plot? Apparently evicting the tenant is frowned upon. Although they did it in Paris and filled the catacombs with the previous tenants. Reply With Quote
  • 1 Like


  • fjlip's Avatar Jul 31, 2020 | 12:53 26
    Quote Originally Posted by Richard5 View Post
    This is what is on my corporate financial statement package.

    Working capital ratio - At least 50%.

    Target goal of debt to equity would be less than 40%

    % owners equity - greater than 70%

    I think all of these measurements depend somewhat on ones age and level of comfort. My accountant tells me that he has a number of clients that farm 1500-3500 acres that consistently put up accrued net income earnings of $125-175 per acre and 8000-10000 acre farms that can't get close to that.

    Size doesn't always matter, its all management which is a broad term. Imo, its a slippery slope with every increasing technology and sales pitch to drive the latest and the best. Many farms don't have enough annual earnings to support the spending. Its only a matter of time before more and more fall.
    Accountant has seconded that opinion, 2500 acre is sweet spot for family farm. Bigger and machinery gets doubled or increased in size to be timely, depreciable investment sky rockets. More hired bodies, more complication, more risk and sh*t happens. Ritchie's has some of that business. If not 2500, go for 10-20,000, the scale seems to cancel costs. Reply With Quote
    LEP
    Jul 31, 2020 | 13:17 27
    Quote Originally Posted by fjlip View Post
    Accountant has seconded that opinion, 2500 acre is sweet spot for family farm. Bigger and machinery gets doubled or increased in size to be timely, depreciable investment sky rockets. More hired bodies, more complication, more risk and sh*t happens. Ritchie's has some of that business. If not 2500, go for 10-20,000, the scale seems to cancel costs.
    I think that number is somewhat area dependent. We combine 4500 acres per combine. I can see 3500 working but 2500 would be skinny.

    But remember our goal is to reach slum of the ghetto status. Reply With Quote
    GDR
    Jul 31, 2020 | 13:55 28
    Quote Originally Posted by LEP View Post
    I think that number is somewhat area dependent. We combine 4500 acres per combine. I can see 3500 working but 2500 would be skinny.

    But remember our goal is to reach slum of the ghetto status.
    For sure area dependent, here we have usually dependable land and likely pretty decent net returns compared to lots of areas, but are definitely limited by environmental conditions. Not really too many operations over 2500acres here and in your comparison 2500 acres is really pushing a combine, pretty well anyone with those acreage will be running 2. Kinda amazes me when you sask and southern AB guys talk about the 10s of thousands of acres. Overall just different scenario I guess. Reply With Quote
  • 1 Like


  • Jul 31, 2020 | 15:06 29
    Quote Originally Posted by AlbertaFarmer5 View Post
    Not o sure about your depreciation comment. Have you ever tried to buy or sell a preowned/used burial plot? Apparently evicting the tenant is frowned upon. Although they did it in Paris and filled the catacombs with the previous tenants.
    That plot is more of a long term commitment than an investment. Reply With Quote
  • 1 Like


  • Jul 31, 2020 | 15:12 30
    Quote Originally Posted by LEP View Post
    I think that number is somewhat area dependent. We combine 4500 acres per combine. I can see 3500 working but 2500 would be skinny.

    But remember our goal is to reach slum of the ghetto status.
    You really should aim for Outstanding Sandbox Farmer in the Slum of the Ghetto, I've been vying for it for years, even decades, and bring home the trophy every year! Not much of an honor anymore.....and pissing off the neighbors too. Reply With Quote
  • 2 Likes