What should you pay attention to when interest rates rise?

The turmoil in the Dutch land market appears to be continuing. This means that the price per hectare (on average) continues to rise. This is reported by sources such as the NVM and Land Registry. I also notice it in daily practice. But there is one major threat hanging over the market: the scenario of rising mortgage rates.

At the moment, the European Central Bank (ECB) provides the countries in the eurozone with free money. This partly ensures that the interest rate for both houses and land has been reduced to an unprecedented low level. Interest rates have never been this low historically. Over the past 50 years, the percentages have been significantly higher than they are today.

Very low rates
The rates in the business market are slightly different, but the downward trend with very low rates is also the case here. We come across interest rates in the market as: 3-year fixed from 1,4% to 1,9%; 5 years on average about 2,1% and for 7 years 2,1% to 2,5%. Longer term, for example 10 years, is usually not offered unless explicitly requested. The difference between 7 and 10 years easily amounts to 0,5% and therefore seems less attractive.

Reducing seems near
According to the latest reports, the ECB will continue with its support program for the time being (until the end of this year). The chance of phasing out this is increasing now that the European economy seems to be doing better.

I think it is wise to keep the following things in mind:
1. Dampening effect on land price.
A higher interest rate means that borrowing for land becomes more expensive. If we assume an average land price in the Netherlands of a total of €60.000 per hectare, then at 1% we are talking about €600 per hectare per year in extra costs.

2. Charges up, payment capacity down
Suppose we maintain an average balance of about €2.500 per hectare. This means that the aforementioned 1% interest rate increase results in a 25% decrease in your balance.

3. Less trade
Falling balances and the dampening effect on land prices may mean that there will be less interest. It's not for nothing that an old market wisdom says 'everyone wants to have everything that is expensive'. Psychological effects can result and thus the opposite becomes the case. The effect can be that a chain reaction starts and selling becomes more difficult.

4. Head in the ground
Other factors play a role that partly determine the price or, in fact, can lead to a price increase. Think of land-relatedness in dairy farming, phosphate rights, the increasing interest from outside agriculture due to the improving economy, economies of scale and more sustainable use of the land. You might think it's okay and ignore this warning. Not handy, the last thing to do is 'bury your head in the sand'.

5. Calm before the storm
It is nice and pleasant to talk in generalities with others, for example about land prices, rising interest rates, phosphate rights, the mood in the market or the great news that a Minister of Agriculture is coming. I think the most sensible thing to do is to map out the consequences of an interest rate hike for your own company.

We all know it, sooner or later the increase will come and then? Get started and take advantage of the calm before the storm for yourself. You're not going to wait for someone else to do that, are you? Let us now calculate what your maximum borrowing capacity is, how great your stretch in the interest rate increase and how you can optimize your financing portfolio. 

Peter Pals

Peter Pals is an entrepreneur at Farmers Funding & Advies and grew up on a farm. From his farming heart, he has decided to build up a business for business, financial and tax advice for agricultural entrepreneurs.

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