Shlomi Steve Levy was recently interviewed by Bev Cline for an article which appeared in the Financial Post section of the National Post. In the article, Bev asks Shlomi about how Canadians should purchase US real estate and the special considerations that apply to such cross border purchases.
The article can be found below or by following this link.
March 25, 2015
Want to buy property in the U.S.? Read this first
The seemingly relentless winter of 2015 may be prompting Canadians to consider purchasing a vacation home or condo in the U.S. While the allure of long beach walks or boardwalk strolls is attractive, experts suggests it’s important to do your research.
The red tape costs
First off, be prepared to furnish much more documentation for obtaining a U.S. mortgage than would typically be required in securing a Canadian mortgage, says Alain Forget, director of business development for RBC Bank U.S., a wholly owned subsidiary of the Royal Bank of Canada. “The U.S. market is highly regulated and the process is lengthy, typically taking 45 days to apply for and secure a mortgage in the U.S. from application to closing.”
Also worthy of consideration “is that ‘all in’ costs in the U.S. can be higher than in Canada due to required third-party expenses such as taxes, titling and certain insurances that vary state by state, but are usually around 3%,” he says. In addition, “U.S. mortgage interest is compounded monthly, while in Canada it is compounded semi-annually.”
And keep your eyes open for the foreign national premium that U.S. banks often charge international buyers, primarily due to a lack of information on the prospective mortgagee’s credit history.
But Mr. Forget says RBC Bank does not charge Canadians a foreign national premium “because we can help you draw on your Canadian credit history to help secure financing. The premium can be hefty, representing 1½% to 2% on top of the interest rate.”
On the plus side, says Mr. Forget, “the mortgage can be repaid at anytime without penalty and the buyer can leverage the purchase up to 75% of the value for a vacation home in the U.S., which can help to mitigate the negative huge impact of converting Canadian to U.S. dollars to settle the purchase.”
Given the strength of the U.S. dollar, Canadians purchasing property in the U.S. should consider the best option for financing the property, agrees Shlomi Steve Levy, a Montreal lawyer with Canadian law firm Altro Levy.
“By borrowing in the U.S. with a U.S. bank, you can avoid having to convert the full amount. Rather, you only have to make the monthly payments in U.S. dollars and thus only convert money as you go along, and in small increments,” suggests Mr. Levy, whose firm specializes in cross-border tax, estate planning and U.S. real estate, and has an office in Florida.
In effect, says Mr. Levy, the desirability of this strategy works
“if, over the term of the loan, the Canadian dollar makes a comeback, as any difference between the current exchange rate and the improved Canadian dollar will be a saving to you.” Still, he cautions, “this, of course, is as speculative as any strategy that involves looking ahead at foreign exchange markets.”
You say you want to rent?
The issue can be more complicated if, like some Canadians, you choose to rent out the property for part of the time that you are not in the sunny climes. Many Canadians do rent out their properties for some part of the year, opting to return home to satisfy Canadian residency rules that can have an impact on taxes and health benefits.
Mr. Levy says,
“If your property generates U.S. rental income, the math is very simple. Borrow in the U.S. and pay it back with the rental income. At that point, there is no conversion whatsoever.”
Still, he suggests obtaining professional advice because this strategy, while it avoids currency conversion costs, may have tax implications at home or in the U.S.
Diversify retirement portfolio
Philippe Miot, commercial loans manager, Desjardins Bank U.S., says although the Florida residential real estate market has been severely hit since the recession, “values are slowly but surely appreciating to more normal levels.”
As such, says Mr. Miot, who is based in Hollywood, Florida, now may be a good time for Canadians to consider buying a U.S. property as an investment in their future.
“Snowbirds who come here for six months can easily spend $10,000 to $15,000 U.S. in rent. So obtaining a U.S. mortgage and having a place you can call your own could be a way to diversify your retirement portfolio.”