Rural Bank has taken the lead with a new farm management deposit (FMD) option aimed at helping farmers pay down loans faster.
It’s new FMD offset account, the first of its kind, follows legislative changes to the federal government’s FMD scheme earlier this year which aims to let farmers use interest accumulated in management deposits to help repay borrowings.
The maximum amount able to be salted away in FMDs has also doubled from $400,000 to $800,000.
Rural Bank is getting in early to encourage farmers to use their FMD reserves to help speed up loan repayment options before interest rates inevitably climb.
Although Australian farm lending costs are now at a record lows, or close to them, new year interest rates are tipped to bite, at least a little bit.
Industry analysts expect 2017 will see interest rate activity across the board, partly because US government 10-year bond yields are up from all-time lows of 1.3 per cent in July to 2.5pc this week, and are pressuring global deposit and lending rate trends.
The looming Trump presidency in the US has fuelled expectations of a government spending spree with borrowed money, lifting bond yields.
In Australia variable bank loan rates and first home lending costs began climbing last month with the likes of Westpac, St George, Bank of Melbourne, BankSA and Ubank starting with rises of up to 0.6pc.
FMDs already allow farmers to better manage their cashflow fluctuations by setting aside earnings from profitable years in accounts which can be drawn on when needed most.
The funds are not taxed until withdrawn, giving producers potential tax advantages if they use FMD funds (after 12 months) in low income years.
Rural Bank’s new offset account lets primary producers offset FMD interest against an eligible variable rate term loan, just as home loan borrowers can do to help ease mortgage repayment costs.
Chief financial officer, Will Rayner, said the offset account would not require any special notice period if farmers suddenly needed to draw on FMD funds.
Linking the offset account to a customer’s term borrowings would incur one low upfront linkage charge, but no ongoing fees.
“Although the current low interest environment hasn’t necessarily made interest costs a major concern, anecdotally we’ve had a good number queries about the new offset option since we began talking about launching the product,” Mr Rayner said.
As broader offset loans repayment options were common elsewhere in financial sector, he said it was timely to see the option opening up to farmers with FMD funds available.
The offset deal can only be linked with a single loan taken out by the FMD owner or a farming partnership the owner is involved in.
FMDs held by family trusts and companies are not permitted to use the offset option.
Mr Rayner said the new account was an example of how Rural Bank, a subsidiary of Bendigo and Adelaide Bank, wanted to provide innovative and supportive financial tools to help farmers better manage income and risk variability.
“Australia has virtually the lowest level of farmer policy assistance in the OECD – just 3pc of our gross farm receipts,” he said.
“That’s well below the EU’s average around 20pc and 10pc in the US and Canada.
“With this context, it’s appropriate for policy makers and industry consider ways to back
innovation and assist farmers to overcome income volatility.
“We see FMD offsets helping provide access to the right financial levers to help producers ride out the bumps from season to season.
“We’re not doing this to generate extra revenue for the bank – this will be interest income from loans we’ll forego as customers use FMD earnings to reduce their debt.”
While debt repayment may not be a priority for every farm business, especially those focusing their funds on expansion initiatives, he said it would be no surprise to see interest rates rising to some degree in the year ahead and prompting farmers to review loan cost options.