For much of the pandemic, Canada’s housing market has been on fire, with mortgage originations growing at a record pace.
At the same time, Canadians have also been busy buying up billions of dollars worth of property south of the border.
In 2021, Canadians purchased over $5 billion (CAD) worth of real estate in the U.S., making Canada the largest country of origin for foreign buyers of U.S. property.
But navigating the mortgage process in the States isn’t always straightforward, especially for first-time buyers.
Before exploring some of the similarities and differences with the process in both countries, let’s look at the current state of U.S. home purchases by Canadians.
The COVID impact on U.S. home purchases
Canadians have a long history of purchasing property south of the border, for a variety of reasons—whether it be relocating for personal or career reasons, purchasing an investment property or a second home for Canadian Snowbirds seeking refuge from long, cold winters.
A decade ago, Canadians made up nearly one-quarter of all U.S. home purchases by foreign nationals, according to data from the National Association of Realtors (NAR). In 2012, Canadians made just shy of 50,000 home purchases in the U.S., totalling about $20 billion (CAD).
While that number was in decline even before the pandemic—falling to under 20,000 homes in 2019—COVID-19 lockdown restrictions further eroded the number of purchases made by Canadians. In 2021, Canadians bought 8,800 U.S. properties, worth a collective $5 billion (CAD).
As mentioned above, investors and over-wintering Canadian Snowbirds make up a large percentage of purchases, but there’s also a sizable contingent of Canadians who emigrate to the U.S. each year and require housing.
In 2019, roughly 800,000 Canadians packed their bags and headed state-side. It’s a figure that’s been largely unchanged since the 1980s.
Despite the drop in overall U.S. purchases, brokers like Toronto-based Drew Donaldson are once again seeing a great deal of interest from Canadian buyers looking abroad in search of affordability.
“The 2020 pandemic, and even the first half of 2021, had a large effect on Canadians buying U.S. properties,” said Donaldson, founder and CEO of Donaldson Capital, which facilitates U.S. purchases through referral partners south of the border. “For the second half of 2021 and into 2022, buying is at an all-time high with many Canadians taking vacation and seeing the large price difference between Canadian real estate and U.S. real estate in general.”
But before rushing into buying property abroad, there are some key differences in the financing process that buyers need to be aware of.
U.S. versus Canadian mortgages
While NAR data show that over half (66%) of Canadian purchases of U.S. properties in 2021 were all-cash deals, that still leaves thousands who needed a U.S. mortgage.
So, what is the process for a Canadian wanting to purchase property south of the border?
While there are many similarities in obtaining a mortgage in Canada and the United States, there are also some stark differences.
Here are some of them:
- Terms and rates. One of the biggest differences between U.S. and Canadian mortgages is the standard term lengths and associated mortgage rates. Typically, U.S. mortgage terms span the length of the amortization period, which can range from 15 to 30 years. As a result, mortgage rates are generally higher, but are stable throughout the term, barring any re-negotiations.
“This completely removes interest rate risk once you buy, and hedges well against inflation,” Donaldson noted.
For adjustable-rate mortgages, the rate typically remains the same for the first three to 10 years, after which time it may adjust annually based on market interest rate changes.
- Processing times. The standard processing time for Canadians buying a U.S. property is 45 to 60 days from the start of their application to closing, “as the U.S. mortgage industry is more regulated than the Canadian mortgage industry,” BMO advises. “Even so, most of the basic underwriting criteria is pretty much the same as in Canada, like good credit history, ratio of income and current debts.”
- Higher fees and upfront costs. Certain costs may be higher in the U.S. compared to comparable purchases in Canada. This can include appraisals, survey fees, titles searches, property inspections and lender review fees.
- Documentation. As in Canada, U.S. regulators require substantial documentation as part of a mortgage application as they look to confirm a good credit history, along with an acceptable debt-to-income ratio. That means buyers need to provide proof income for the past two years, a purchase agreement, along with any existing mortgage and property statements, personal bank account statements and insurance documents. Some lenders will also require copies of the purchaser’s passport or work visa, as well as their social insurance card (from either Canada or the U.S.).
- Down payment. The minimum down payment typically required for a U.S. purchase is between 20 and 30 percent, depending on the property type and the borrower’s credit.
- Prepayments. Most mortgages in the U.S. can be paid off in full or in part at any time without penalty, whereas this is only true of open mortgages in Canada.
How to buy a U.S. property
Canadians interested in buying a U.S. property typically have three options available to them.
The first is an all-cash deal. For those with the means, this is the easiest option and avoids any cross-border financing arrangements. As noted above, NAR data shows upwards of 66 percent of Canadian buyers made all-cash purchases last year.
For the rest, they can either withdraw the required funds from their existing home equity line of credit (HELOC) on their Canadian property or obtain a mortgage. Mortgages are available directly from American lenders and brokers, or through Canadian brokers and lenders that are licensed to arrange U.S. mortgages.
For those who prefer to deal with a big bank, their options include those with operations in the U.S., including TD Canada Trust (via TD Bank), BMO (via BMO Harris), CIBC (via CIBC US) and RBC via its RBC U.S. HomePlus Advantage program.
Of course, none of these is available through the broker channel (TD is on the Canadian side, but not for U.S. mortgages).
Which brings us to mortgage brokers.
For those who prefer to deal with a mortgage broker, there are indeed Canadian brokers who are licensed to deal with U.S. mortgages. They’re just not as plentiful.
Donaldson explains that the hurdle for Canadian brokers to become licensed in the U.S. is a high one, which discourages many.
“There is a small opportunity for financing Canadians for U.S. properties, but it’s not nearly as attractive as the Canadian business right now, if that is where you are stationed,” he said.
The time and effort needed to wade through all of the regulation is another big hurdle, he noted. “If you are successful with your Canadian operation, you likely won’t have time for the U.S. market and all the regulation/licensing that goes along with it,” he said. “If you have plenty of time, then perhaps your Canadian business isn’t as successful as it should be, and what makes you think you can operate another entire business in another country?”
There are also a variety of other options for buyers, including private and alternative Fintech lenders sprouting up.
One such option is Lendai, a self-described “digital-first lender” that allows non-resident investors to purchase U.S. property via an online mortgage approval process.
The company says it leverages its AI-based triple digital underwriting system to analyze thousands of data points to assess the creditworthiness of foreign investors, the likelihood of recouping money should the borrower default, and the value and cash flow of the property at present and in the future.
The company says its tech-based approach can cut mortgage approval times to as little as one week.
“Via Lendai’s online platform, a foreign investor can complete the entire loan process, from application to closing, fully online from the comfort of their own home, whether it’s in Canada, the U.K., Europe or Australia,” said CEO Yair Benyamini.
For those interested in purchasing property in the U.S., Donaldson has this advice: “I would say whatever country you earn an income in is where you should take out the majority of the mortgage, especially with the Canadian dollar hovering around 80 cents.
And if you don’t have much equity in your Canadian home, you probably shouldn’t be buying a house down south fully mortgaged.”
Canadian Purchases of U.S. Real Estate – Quick Facts
- Canadians made up 8% of total foreign buyers in the U.S.—the top country of origin among foreign buyers
- Canadian purchases totalled over $5 billion (CAD) in 2021
- Top destinations for those Canadian purchases were: Florida (38%), Arizona (24%) and California (7%)
- The average purchase price paid by Canadian buyers was $601,100 (CAD)
*Source: National Association of Realtors (April 2020 to March 2021)
This article was first published in Perspectives magazine (Issue #1, 2022)