The number one aspect of buying a property abroad on most people’s minds from the word go is the fiscal one. This is of course compounded because you’re buying in a foreign currency. So what are the financial aspects of buying a home in Canada?
The financial aspects of buying a home in Canada do include currency conversion, but they go far further than that. When buying a property overseas, preparation is the key. The first thing you need to established is the budget available. You need to take into account required deposits, current and future exchange rates, total cost of finance, legal fees and tax obligations. So, if you’re planning on immigrating to Canada, retiring or even buying an investment property in Canada, this guide to the economic essentials involved in a Canadian real estate purchase should assist you.
Securing a Local Mortgage When Buying a Home in Canada
The first thing you need to think about is whether you will need a mortgage to buy in Canada. If you’re going to be living in Canada or indeed, if you want to secure your mortgage in Canadian dollars, it may pay to speak to a Canadian bank about whether they will lend to expatriates and international citizens.
In many aspects the Canadian mortgage system resembles the British one. However, when borrowing from a Canadian bank to buy a home in Canada one should bear in mind the following factors:
- The Canadian system is very creditor-friendly. In cases of default, banks can seize all of a borrower’s assets, not only the house
- The standard mortgage in Canada is a five-year mortgage amortised over 25 years. That means the loan balance has to be refinanced at the end of five years, exposing the borrower to any increase in rates that might have occurred
- On the other hand prepayment penalties for borrowers hoping to exploit a decline in rates are very high
- Canadian mortgages are portable — if you move before the five-year term is up you can apply your old mortgage to your new home. For a more expensive property, you will need to take out a new loan for the excess
In general the Canadian mortgage system is quite safe and solid with tight regulations and supervision. The banks are not allowed to offer the risky mortgage structures that happened across the border in the USA. Underwriting standards are also high in Canada, and that possibly explains a very low rate of default.
The list of documents that a lender might ask for is close to the one that British banks usually require.
For different employments, lenders need different documents. Most lenders classify 2 types of borrowers based on their jobs, salaried employment and self-employment.
For Salaried Individuals: most lenders only want two income proving documents, for example a recent payslip and an income tax return plus a Letter of Employment.
For Self-Employed Individuals:
- Personal Tax Returns for the past 3 years, including schedules
- Notice Of Assessment for business or personal
- Signed Income Statement & Balance Sheet
- Audited Financial Statement or Business Tax Return
- Business Credit Report
- Articles of Incorporation
Apart from these, you will be required to demonstrate proof of your identity, residency, decent credit history, state of your bank account, property details and proof of deposit.
Securing an International Mortgage
If you have a good credit rating in the UK however, you may find you get preferential rates from a British lender who offers international mortgages.
There are international mortgage brokers out there who can help – but generally speaking, they cover a small number of lenders in a large number of nations rather than lots of lenders in many countries. So you may get further if you investigate your options by yourself.
Usually an international lender will require the following documentation:
- Proof of identity (passports, driving licence, or other suitable photo ID.)
- Proof of residence (utility bill, bank statement etc. dated within the last 3 months)
- Proof of income (latest payslip, tax return, copy of accounts etc.)
- Proof of existing mortgage or rent payments (usually covering the last 12 months)
- Proof of deposit (last 60 days bank statements showing source of funds)
- Bank statements (usually last 60 days to show salary credits and outgoings)
- Property details (copy of sales particulars, or sales contract)
With a mortgage at least agreed in principle you should know how much you have to play with in Canada.
Your next step is to open a Canadian bank account or an international bank account before completion, from which your mortgage repayments will be debited. This can also be used for utility bills, taxes etc. Make sure you have enough available to cover your mortgage costs, regular bills and taxes otherwise you could encounter serious problems such as a downgrading of your credit rating or even repossession of your home.
Fund Transfers and Exchange Rates
Now, because of the fluctuating exchange rate it is going to be very important that you allow yourself some room for movement when looking at properties, avoid homes close to the top of your budget range as an adverse movement in currencies could see you falling short of the asking price after making an offer.
You must also speak to a currency specialist about fixing your rate of exchange the closer you get to a purchase. You have a number of options, you can purchase Canadian dollars with your deposit monies at a set rate or you can take an option to buy when the exchange rate reaches a certain point. Take expert advice on this and do not leave it until the last minute either.
With an idea of what you can spend in mind it’s time to go house hunting in Canada!
Once you have found a property, rechecked your finances and made an offer, any preliminary contract signed needs to be subject to you getting the mortgage you need to buy your home in Canada. When it comes time to transferring money into Canada you must ensure you get a Certificate of Importation for the money from any bank you move the cash to so that you can prove where the money originated from and where it went in the event of questions being raised later on.
Finally, don’t forget to factor in the additional purchase costs when buying a home in Canada. These can add up to 10% depending on what is included in the purchase price and the province in which you buy.
In some provinces, you may have to pay a land transfer tax (a sales tax on property). Metro Vancouver has introduced a 15% property transfer tax for foreign nationals buying real estate there.
You may also have to pay: a mortgage broker’s fee, an appraisal fee, surveying costs (if the seller couldn’t come up with a current survey), a high-ratio mortgage insurance premium (if your down payment is less then 25%), an interest adjustment. Ask your realtor and solicitor up front about these costs before you commit to buying your home in Canada.