While U.S. mortgage lenders are heading south of the border to finance real estate in Mexico and Central America, the push to penetrate the Canadian mortgage market is considerably cooler — even with the 2010 Olympic Games in Vancouver just around the corner.
Retirees and aging baby boomers “from the states” are drawn to Canada for its wonderful skiing, health care, bargain medicine, terrific sailing and clean air, but the numbers of second-home buyers and older full-time residents have not been as attractive to lenders as the pool of thousands of snow birds who head south.
Americans can borrow from Canadian banks and vice versa. But trying to finance Canadian property with U.S. funds becomes difficult. Location, security in the property and the ability to enforce simply make the package unattractive to most U.S. lenders. GMAC, one of the more interested international mortgage participants, recently introduced a 30-year, fixed-rate loan in Mexico, but officials say they are “not that close” with a Canadian product.
If you are thinking about borrowing in Canada to buy a condo so you can enjoy mountain views and the skiing, don’t expect to see the loan options available that are common in the United States. Most Canadian conventional loans are written with a 5-year term. There are some 7- and 10-year options available but the most popular loans right now are 6-month, 1-year, 3-year and 5-year loans (comparable to our adjustables and known as “open”), each typically amortized over a period of 25 years.
“Open” does not mean the borrower’s monthly payments adjust as the monthly market fluctuates; it means the borrower can prepay the loan at any time. Borrowers pay more for an open loan. Fixed-rate loan rules allow for prepayment only once a year. When a loan reaches its term, the lender usually renews it.
Shorter loan terms encourage borrowers to consider paying off loans as soon as possible, giving the consumer more of a stake in the property. This accelerated equity makes more sense to Canadians than it does to U.S. taxpayers because Canadians are not able to deduct home-loan interest from their taxes. For some American consumers, the mortgage-interest deduction is the only major write-off available.
Many investment advisors say that folks looking to purchase property abroad — for investment or a principal residence — often refinance or take out a home-equity loan on a property in the United States and pay cash for the “offshore” home. That way, all financing questions are eliminated and the interest on the home-equity loan or refinance often is tax deductible.
If you are looking at the Canadian property solely as an investment, research the capital-gains ramifications if you expect to execute a tax-deferred exchange. You may be able to rent the getaway — especially if it’s in a popular location such as Whistler where snow skiers can be seen on the mountain-top glacier nearly 12 months a year — but it will not qualify as a “replacement property.”
With investment property in the United States, you can defer your capital gain if you buy a “like kind” property of equal or greater value than the one you sold, provided you identify it within 45 days and purchase the replacement property within 180 days from the day you sold the first property. The Internal Revenue Service says any property outside of this country is not “like kind” so no capital gains taxes can be deferred.
Americans face two large issues when investing in real estate abroad. First, you have the appreciation or depreciation of the real estate itself — or the “property side” of the decision. You also have the currency risk when you sell the property and bring the money back into this country. If the Canadian dollar slides, you run the risk of losing money on that investment. However, if the Canadian dollar improves against the U.S. dollar, your investment suddenly rises significantly.
While a U.S. dollar is not worth as much in Canada as it was the past several years, Canadian recreational real estate is appreciating. Not only has the Vancouver-Whistler corridor been booming, but European investors are encouraging their clients to consider the eastern provinces of Newfoundland, Prince Edward Island, Nova Scotia, New Brunswick, Quebec and Ontario as recreational investments.
However, you won’t find a lot of U.S. lenders waiting to lend you the money to buy.
Tom Kelly’s new book, “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border,” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com. Tom can be reached at firstname.lastname@example.org.