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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2016

Look to the Great White North

Despite the weak Canadian dollar, it’s still an excellent time to finance a home in the U.S.

Millions of Canadian snowbirds travel to the United States every year to escape the harsh Canadian winter and enjoy amenities like beaches, golf, dining and more. Often those individuals rent property while in the U.S. and miss out on the benefits of owning a home.

That reality represents an opportunity for U.S. mortgage originators — particularly if they have access to expertise on cross-border homebuying. By catering to Canadians living in the U.S., originators can differentiate their business from the competition.

With the weak Canadian dollar, however, many Canadians interested in buying a U.S. home are now looking for the most cost-effective way to carry out the purchase. In the past, many have paid cash for U.S. homes — using the equity in their Canadian homes, cashing out investments, or tapping into their savings. With any of these options, clients pay a significant currency-exchange premium to convert their Canadian dollars into U.S. dollars, substantially reducing the cash they have to buy a U.S. home.

A cost-saving alternative

Consider this typical scenario: A Canadian homebuyer financing a $400,000 U.S. home can save more than $100,000 in Canadian dollars versus paying all cash to purchase it. Assuming a currency exchange rate of $0.75 Canadian dollars per $1 U.S. dollar, a $400,000 home in the U.S. would cost CA$532,000 — representing a currency-exchange cost of CA$132,000.

By financing that same home purchase, the downpayment for the mortgage would be about $90,000, or CA$119,700 — for a currency-exchange cost of CA$29,700. The cost savings achieved in this case by financing the home purchase via a mortgage, compared with an all-cash purchase, would be CA$102,300.

Mortgage financing, then, reduces the one-time currency-conversion expense. Plus, clients can generally pay their mortgage off with no prepayment penalties when the strength of the Canadian dollar improves. Of course, there is an interest expense with financing the home purchase that, over time, could cancel out the currency-exchange savings. In the example outlined, that breakeven point would take some 18 years to arrive, assuming a fixed 3.5 percent interest rate on the home loan and a consistent exchange rate.

Given that many Canadians buying U.S. homes are baby boomers, the likelihood that they will keep their mortgages for two decades is low, however. It is more likely that they will sell the home well before the term ends and repay the balance of their U.S. mortgage. In addition, if the Canadian dollar improves against the U.S. dollar, the interest cost is mitigated, extending the life of the upfront savings.

Other benefits

One often-overlooked benefit of owning a home in the U.S. is the rental income that can be earned from the property when the owners are back in Canada. It can take as little as a few months of rental income to cover U.S. taxes, insurance and homeowners-association fees. The rental fees are paid in U.S. dollars, so there is no need to exchange currency — saving the homeowners even more money.

U.S. originators working with Canadian snowbirds can make a convincing argument that now is the right time to purchase U.S. property. By working with the right cross-border specialists, interested originators can assist Canadians in purchasing their U.S. dream home by taking advantage of the following:

  • Relatively low U.S. interest rates: Long-term interest rates continue to hover at historic lows in the U.S. mortgage market.
  • Their Canadian credit history: A cross-border specialist can use homebuyers’ Canadian credit histories to help them secure a U.S. mortgage.
  • No prepayment penalty: If the Canadian dollar improves, borrowers can pay off the loan early without added cost.
  • No foreign national premiums: Again, working with the right cross-border specialist can help avoid the foreign-national premium often charged by U.S. lenders, and that can save borrowers up to 3 percent on their loans.

Although the current value of the Canadian dollar against the U.S. dollar is low, the value of U.S. properties in hot snowbird markets has generally been increasing. Canadians who are U.S. homeowners are in a favorable position to benefit from that appreciation and the stronger U.S. dollar. They can refinance their U.S. homes, for example, and use the surplus money earned from the currency exchange for virtually anything — home improvements, a dream vacation, to pay off debt in Canada, or to pursue other investment options with help from their financial advisers. 

• • •

Working to understand the Canadian dollar and global markets, and parlaying that expertise to advise international buyers, is a great way to separate your business from the pack as an originator. Also, don’t forget the importance of collaboration with a cross-border expert who “speaks Canadian” and can help your clients secure a cost-effective mortgage in all 50 U.S. states.


 


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