Property prices in Mexico have risen substantially in recent years, especially the coast and colonial cities, but the value may be sought with time and patience, for example, some coastal properties in Mexico still trade far more affordably than coastal properties in the US or Canada. Properties in Mexico can also offer an annual rental income, depending on where the properties are situated. Whatever reasons you may have, property investment in Mexico can offer good value for your money; but as with all property investments, you’ll need to do your homework first.
Historically, the overwhelming number of real-estate deals in Mexico have been settled in cash. However, with the stabilization of currency markets across the world, Mexican Banks are now beginning to offer mortgage products for the purchase of a real estate in Mexico, although significant deposits are required and interest rates are not as attractive as those in the US, Canada, and Europe.
While traditionally these transactions would be conducted in cash, there is now increasing availability of financing for the property, both in Mexican pesos and US dollars. The Mexican mortgage market already shows a certain degree of maturity, but to consolidate that process, people should think of mortgage credit as an additional tool to build wealth and as part of their personal and family finances, rather than just liability or debt. There have been important changes in the market. Maybe 10 years ago 98% of the loans that were given, including banking, had to do with buying new housing; currently, approximately 40% corresponds to the acquisition of used housing, and within other items are the financing of remodeling, individual construction, completion of work, liquidity, financing of liability payments and improvement of conditions. In short, it can be said that there is a certain maturity and also a greater specialization in financing for housing in Mexico, which is positive for all of us who participate in the industry.
Even if you as a buyer has the ability to pay cash for a property, it might make sense to not tie up a lot of cash to purchase real estate overseas, for that reason, here are some financing options:
Developer Financing
Real estate developers, especially those catering to foreign clients, generally offer a few financing options to potential clients. Most of the financing options will require 20% – 50% down, with the balance to be paid within 3-5 years. Interest rates will vary, most rates fall somewhere between 5% – 10%. If you’re on a tight budget and you don’t need to move into a place in Mexico right away, you might want to consider buying something from a developer pre-construction. You can save about 20% off the price of a finished unit and it’s generally easier to get developer financing. If you do choose to buy a unit pre-construction, you’ll still need to have the capital to put down to make it work. Here’s a pre-construction payment plan taken from an unnamed development:
* 30% down payment at the time of the contract
* 20% due at the time of delivery Financing starts after delivery 50% of the value financed over 36 months at 8% interest.
Cross-Border Finance Companies
There are companies that specialize in offering mortgages to Americans and Canadians who want to purchase property in Mexico. You can find several by doing a Google search for “cross-border mortgages Mexico”. This is a popular option for many future ex-pats because these companies offer terms that closely mirror traditional mortgages in the U.S. and Canada. There are a few things to keep in mind when using one of these services:
There is normally a minimum loan amount somewhere in the neighborhood of $100,000 – $150,000 USD. The interest rates are typically higher than those offered back home. If you are buying the restricted zone, some lenders will not give you a loan if you choose to structure it under a Mexican Corporation as opposed to a bank trust known as a fideicomiso.
Down payment: A minimum down payment of 20% is required. For the lowest interest rates, down payments of 30% to 40% are required
- Loan Duration: 3, 5, 7, 10 years
- Term/Amortization: 10, 15, 20, 25, and 30 years
- Credit scores: Minimum of 650
- Interest Rates: As low as 6.75%, but for more attractive down payment options and higher loan amounts, interest rates range from 7.5% to 9.5%.
- Maximum Loan Amount: None, on a case by case basis
- Currency: All loan programs are denominated in U.S. dollars
- Property Use: Primary, Vacation, and Investment Properties Property Type: Single Family Homes, Town Homes, and Condominiums.
My suggestion compares the rates and conditions of multiple lenders. This may save you a lot of money and headaches in the long run.
Charges and Paperwork
As with most financial loan products, there are a number of charges and required documents to file in order for the credit to be released.
Charges
Common charges to open a mortgage account include commissions, charges for conducting socioeconomic studies of potential borrowers (which some charge you whether or not the loan is granted), mortgage life insurance, property insurance, home valuation, and Notary Public expenses (notary expenses are paid directly to the notary).
Checks and Research (Paperwork)
Before they lend you the money, the banks conduct extensive investigations of their potential clients, including proof of income, checking the credit bureau for your credit history reports, as well as socio-economic studies to assess the risk of the loan.
Among common loan requirements are:
- A minimum age, usually 18 but it depends on the bank, and not older than 70
- Proof of income (dual incomes can be considered for couples)
- Bank references and recent statements
- Official identification and proof of address
- Birth certificate and marriage certificate if applicable
- Immigration documents, e.g. FM2 or FM3.
Documents related to the property such as:
The sale contract
- Proof of down payment
- Copy of the deeds (of the land in the event the loan is for construction)
- Copies of receipts for rates and water bills
- Copy of architectural plans.
Lead Times
Banks have been improving the ‘turn-around’ for loan approvals in recent years. Some will give a decision ‘in principle (subject to further investigation) within a few days and may release the funds within a couple of weeks. The process can take much longer, though, so you should be prepared for this.
Don’t get yourself into a non-negotiable or time-limited contract to buy a property on the basis of a loan given ‘in principle’ as the bank may take longer than you expect to complete the necessary checks and may even refuse the loan at the eleventh hour.
Even when the loan is agreed upon, it can take up to several weeks for the bank to release the funds. The key thing to keep in mind is: stay flexible and don’t paint yourself into any binding (time limiting) contractual agreements before the funds have been released by the bank.
Considerations when Financing Mexican Property
For people who have dollar incomes, the idea of borrowing in pesos may appear attractive, given the possibility of the peso depreciating against the U.S. dollar, which would lower the payments (and overall debt) in the future in dollar terms. While exchange and inflation risks are already factored into current peso lending rates, banks appear to be fairly confident that there won’t be a massive rise in local interest rates, hence the fixed-rate loans over periods as long as 15 or 20 years.
While that’s no guarantee that there won’t be a surge in interest rates, it’s also possible that a peso loan could work out more expensive over the life of the loan, if there’s no significant devaluation. The sharp devaluations and surges in interest rates such as those that caused banks to pull out of the mortgage market almost entirely in the mid-1990s aren’t expected to be repeated. One indication of this is that the Mexican government is currently borrowing money in pesos from 10 years to 30 years at less than 8% a year.
A number of Mexican banks, in particular, have incentive schemes in place offering, for example, rate discounts for prompt payment. However, if you miss a payment the discount rate disappears and the higher rate may be applied retrospectively to the loan.
Some schemes offer lower rates of interest at the start of the loan (“teaser rates”), but these are usually offset with slightly higher rates later on. It’s important to consider the cost of financing over the entire term in order to understand the true cost of the product being offered to you.
Most (but not all) mortgage products sold by banks have no penalties for early payment. Check the small print before you agree to the loan if there is a chance that you may want to repay the loan early; for example, if you sell the property or pay off the loan with the maturity of a different investment. The best advice when considering whether cash or mortgage makes the most sense is to opt for the choice that gives you the bigger bang for your buck. Also, ask yourself which will provide the greater return on your investment.
If you decide to purchase a house with a loan, make sure you can easily afford the principal and interest payments each month. If you decide to go with cash, make sure you’ll still have enough to cover ongoing costs like property taxes, homeowners insurance, homeowner association, and other fees each month.
Remember even if you are considering buying or invest in real estate, always think of an easy exit to get your ROI. The easiest way to get liquidity is renting your property, so before asking for a loan, get sure you are not only purchasing the right location, make numbers, get a good price and get familiar with the market. Remember sometimes your homework is beyond to be at the right place, at the right time!
