While U.S.mortgage lenders are heading south of the border to finance real estate inMexico and Central America, the push to penetrate the Canadian mortgage marketis considerably cooler — even with the 2010 Olympic Games in Vancouver justaround the corner.
Retireesand aging baby boomers “from the states” are drawn to Canada for itswonderful skiing, health care, bargain medicine, terrific sailing and cleanair, but the numbers of second-home buyers and older full-time residents havenot been as attractive to lenders as the pool of thousands of snow birds whohead south.
Americanscan borrow from Canadian banks and vice versa. But trying to finance Canadianproperty with U.S. funds becomes difficult. Location, security in the propertyand the ability to enforce simply make the package unattractive to most U.S.lenders. GMAC, one of the more interested international mortgage participants, recentlyintroduced a 30-year, fixed-rate loan in Mexico, but officials say they are”not that close” with a Canadian product.
If you arethinking about borrowing in Canada to buy a condo so you can enjoy mountainviews and the skiing, don’t expect to see the loan options available that arecommon in the United States. Most Canadian conventional loans are written witha 5-year term. There are some 7- and 10-year options available but the mostpopular loans right now are 6-month, 1-year, 3-year and 5-year loans(comparable to our adjustables and known as “open”), each typicallyamortized over a period of 25 years.
“Open”does not mean the borrower’s monthly payments adjust as the monthly marketfluctuates; it means the borrower can prepay the loan at any time. Borrowerspay more for an open loan. Fixed-rate loan rules allow for prepayment only oncea year. When a loan reaches its term, the lender usually renews it.
Shorterloan terms encourage borrowers to consider paying off loans as soon aspossible, giving the consumer more of a stake in the property. This acceleratedequity makes more sense to Canadians than it does to U.S. taxpayers becauseCanadians are not able to deduct home-loan interest from their taxes. For someAmerican consumers, the mortgage-interest deduction is the only major write-offavailable.
Manyinvestment advisors say that folks looking to purchase property abroad — forinvestment or a principal residence — often refinance or take out ahome-equity loan on a property in the United States and pay cash for the”offshore” home. That way, all financing questions are eliminated andthe interest on the home-equity loan or refinance often is tax deductible.
If you arelooking at the Canadian property solely as an investment, research thecapital-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 locationsuch as Whistler where snow skiers can be seen on the mountain-top glaciernearly 12 months a year — but it will not qualify as a “replacementproperty.”
Withinvestment property in the United States, you can defer your capital gain ifyou buy a “like kind” property of equal or greater value than the oneyou sold, provided you identify it within 45 days and purchase the replacementproperty within 180 days from the day you sold the first property. The InternalRevenue Service says any property outside of this country is not “likekind” so no capital gains taxes can be deferred.
Americansface two large issues when investing in real estate abroad. First, you have theappreciation or depreciation of the real estate itself — or the “propertyside” of the decision. You also have the currency risk when you sell theproperty and bring the money back into this country. If the Canadian dollarslides, you run the risk of losing money on that investment. However, if theCanadian dollar improves against the U.S. dollar, your investment suddenlyrises significantly.
While aU.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 theVancouver-Whistler corridor been booming, but European investors areencouraging their clients to consider the eastern provinces of Newfoundland,Prince Edward Island, Nova Scotia, New Brunswick, Quebec and Ontario asrecreational investments.
However,you won’t find a lot of U.S. lenders waiting to lend you the money to buy.
TomKelly’s new book, “Cashing In on a Second Home in Mexico: How to Buy, Rentand Profit from Property South of the Border,” was written with MitchCreekmore, senior vice president of Houston-based Stewart International. Thebook is available in retail stores, on Amazon.com and on tomkelly.com. Tom canbe reached at news@tomkelly.com.
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Copyright 2007 Tom Kelly