(You'll need to get a little creative!)

Can you feel the warm breeze? Smell the rich floral earth?

Sarah and Jackson were fed up with the long, dark, and cold Canadian winters. In 2024, they took a month-long winter vacation to Costa Rica and fell in love with the place. Before long, they found themselves in the back of an SUV driven by Michael Mills, owner and broker of Re/Max Costa Rica, touring potential properties. Naturally, the topic of purchase financing came up.

Last updated August 7, 2024

Considering a Vacation Home in Costa Rica, Panama, Mexico, or Other Warm Destinations?

Canadians’ lifestyle choices significantly influence where and how they choose to live. Second homes have become increasingly popular for winter getaways and vacations. The good news is that it’s possible to finance a second property with owner-occupied interest rates and rules.

Here's a video summarizing the content below.

Understanding Mortgages for Foreign Properties

It's important to understand that Canadian mortgage lenders require  their mortgages be registered on the land title or deed for properties located within Canada. This is because, in the event of a mortgage default, the bank needs a legal process, known as foreclosure, to seize and sell the property. This process involves Canadian lawyers and must be enforceable in a Canadian court. Similarly, lenders in other countries will only lend on properties within their own jurisdictions. Therefore, securing a mortgage from a Canadian lender for a foreign property is not a viable option.

It’s important to understand that any mortgage lender will only provide mortgages on properties within their legal jurisdiction (i.e. their home country). 

Alternative options for Canadians to obtain mortgage financing on a non-Canadian property

Here are some options:

Option 1: Use a Canadian Bank Operating Abroad

Some Canadian banks have branches in foreign countries. Borrowers typically need to deal directly with the foreign bank office, not a Canadian branch. For example, in the USA, where the language and rules are quite similar to Canada, this process can be straightforward. However, in other countries, obtaining a mortgage locally can be time-consuming, exhausting, and expensive. Scotiabank and HSBC operate in many countries, along with other local options. You would need to visit a bank in your target country.  Sorry, we can't help you.

Option 2: Refinance Your Principal Canadian Residence

For many, refinancing your primary Canadian residence and using the equity to purchase your foreign home is the simplest finance solution, assuming you have a small or no remaining mortgage. You can refinance up to 80% of your home’s value. For example, if your home is worth $800,000, you can refinance up to $640,000 (80% of appraisal), and use those funds to pay off the existing mortgage with the balance left over to "pay cash" for the vacation home. This approach offers several advantages:

• Lower interest rates because the refinancing is on your permanent residence in Canada.
• Much lower rate likely than would be offered by a foreign bank.
• No mortgage financing requirement on the vacation home, which simplifies the purchase process.
• No mortgage-related restrictions on using the vacation home, including renting it out.
• We can help you arrange stand-by access to funds and get you approved in Canada well in advance of home shopping abroad.

Option 3: Purchase a Canadian Rental Property Instead

This option is a little harder to understand, but its essentially equivalent to owing the foreign property, and perhaps better.

First consider that if you need mortgage financing to obtain the foreign property, you have accepted the fact that you are going to have a mortgage payment, as well as property management expenses, taxes, insurance, and utility expenses, not to mention the "fun" that often goes along with managing a property from afar. Let's pretend for one moment that this aspiration will cost you $2500/mo. If you are the only one using the property, then that is $30,000/yr out of pocket. 

...if you need mortgage financing to obtain the foreign property, you have accepted the fact that you are going to have property carry costs including the mortgage payment.

Now consider buying a rental property in Canada instead with the same annual $30,000 carry cost. HOWEVER, now you can easily rent this property to a tenant and earn income, say $3,000 per month or $36,000/yr income. Voilà - use this $36K/yr income to fund your travel aspirations!  If you can rent a nice condo for $3K/mo in Mexico for 5 months each year ($15K), you are financially way ahead of the game.

With this strategy you get the same benefit/outcome (i.e. ocean breeze in your face) at a lower cost, and with additional flexibility:

• No fuss with foreign ownership, leave the keys at the front desk when you leave!
• Avoids the many complications of foreign ownership (property management and taxes to name the big ones)
• Generates consistent income (Canadian income is much easier to obtain and manage)
• Use the income to support annual trips to your favorite warm spot
• Provides the option to try new destinations if the current one is getting old.
• Likely better capital appreciation in Canada than abroad.
• You can read about rental purchase financing here.

Best Finance Option

Mike, the Realtor, has tried and tried to get local financing for his predominately Canadian, US, and UK customer base, and it's a tough slug. That's why he recommends Option 2, which is what Sarah and Jackson in our story above did. Having cash also gave them a much better negotiating position.

Personally, we think Option 3 should also be given serious consideration, but we are happy to advise on either Option 2 or 3. Give is a call or request a review.

If you'd like to explore your finance options, please feel free to contact us.