I recently got a Facebook message from a reader who was in a bit of a pickle about how to purchase a place in lower mainland, B.C. using the equity from a home she owned in southern Mexico. She asks:
I own a home in southern Mexico with no mortgage and no outstanding debt. Now, I’d like to take the equity from this home and use it to buy a place in British Columbia. I am a Canadian citizen and, up until now, I’ve been renting a place during the months that I live in Canada. Now, with a few grandchildren around, I want to have a more permanent place in my home country. What do I need to know to make this happen?
My response was to channel my inner Mark Twain: “Buy land, my son. They’re not making any more of it.” Now, I’m sure Twain never envisioned the density of contemporary cities when he first uttered these words. Still, he certainly appreciated how finite land was, and is, as a resource. He isn’t alone. Many people consider property an integral part of their financial plan. (I’m not here to debate the merits of this thinking.) Despite the persistent global interest in property, the process of buying across international borders is, at times, quite difficult.
You need Canadian credit
Would it surprise you to learn that your exceptional credit history in Mexico—of paying off your house mortgage and paying your bills on time—means little, if anything, in Canada? Truth is, it’s a limitation just about any landed immigrant has to face when settling in our country. Despite what could be a long history of acting like a responsible consumer, that history means little as soon as you cross into our Canadian borders. And we’re not alone. A Canadian’s credit history means little to a banker in the U.S. and possibly even less to a UK or French mortgage lender.
Truth be told, many countries don’t even have a concept of credit history (the FICO rating system was only adopted in North America in the late 1980s).
Trouble getting a mortgage
Why does your credit history matter? Because it’s hard, really hard to get a mortgage or a loan without some sort of Canadian credit report. Of course, given the low interest rate environment, getting a mortgage seems like the best option—but just because you are a Canadian citizen, doesn’t mean you have a Canadian credit record. If you don’t pay bills in Canada, own and use a Canadian credit card, or make other debt payments to a Canadian institution than you won’t have that much-needed domestic credit history. That means any mortgage you can get will take more and cost more.
That doesn’t mean a Canadian bank won’t lend you the mortgage money. Canadian lenders will, quite frequently, extend loans to non-residents who choose to buy property in Canada. However, be warned: You will require a significantly larger down payment—say 35% or more—and you’ll need to verify your income and credit worthiness. The more verification you can offer, the better the terms.
If, however, you think getting a mortgage is off the table, then consider one of two other options: pay for the house outright using saved cash, or get a line of equity and use that to purchase the property.
Consider the exchange rate
If you don’t have the cash saved or you don’t want to liquidate other assets then the only feasible way to purchase the Canadian home would be to obtain a mortgage or line of credit on your Mexican home, then exchange that money and use it to buy the Canadian property outright.
If you do opt to go this route, be sure to talk to bankers in both Mexico and Canada; there may be institutions that have reciprocal agreements—branches that work together in both countries, hopefully making easier and less expensive to take on this debt, convert the funds, and buy the property.
Do the math
However, before you launch into home buying mode, I need to state the obvious: Do the math. It’s not enough to consider whether or not it’s cheaper to buy rather than rent when you stay in B.C., you should also take into consideration exchange rates and the impact they’ll have on your buying potential.
Not only will you need to convert Mexican pesos into Canadian dollars—to buy that home—but you also need to factor in the current exchange fee you pay to convert Canadian investment funds and retirement pension into Mexican pesos. If you do end up taking out a Mexican loan, you’ll have to pay that loan back in pesos, which means ongoing exchange fees to make those payments.
You can skip the first-time buyer rebates
Finally, you’ll need to be careful with how you approach the B.C. home purchase when it comes to first-time buyer status. According to the CRA, you qualify as a first-time home buyer if you (or your spouse) did not live in a home that you owned during the last five years. This is only important if you plan to withdraw money from your RRSP in order to help fund the purchase of the home. Under CRA rules, only first-time buyers can use the Home Buyers’ Plan, which allows both you and your spouse to withdraw up to $25,000 each from your RRSP for a 15-year interest-free loan, as long as the money is used to purchase a home you will occupy as a first-time buyer.
However, the rules are different if you want to qualify for the land transfer tax (LTT) rebates. According to the LTT rules, you must reside in the purchased home within nine months of purchase in order to qualify for the rebate. So, if you buy but don’t move back for 12 months, or purchase and rent out the home before the nine months, you may be considered ineligible for the rebate. Also, the LTT rebates only apply to people who have never owned a property. That means if you owned or had an interest in property anywhere in the world, you do not qualify for the rebates.
If you intend to rent out the Mexican home, be aware that you may be setting yourself up for more paperwork. Any foreign-held property that is not used solely for personal use must be reported to the Canada Revenue Agency using form T1135 Foreign Income Verification Statement (the form is included with your annual return). Keep in mind, this form is only required if the property is worth CDN$100,000 or more. Neglect to file the form and you could be audited and penalized by the CRA—$25 per day, up to a $2,500 fine for each year the form was not submitted (plus interest and other assessed charges).