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RBC Removes Limit on Mortgage Size for Foreign Owners

There’s no longer a limit to the size of a mortgage loan foreign buyers can access at Royal Bank of Canada. Previously, the bank had a cap of $1.25 million on how much it would lend to newcomers with no local credit history.

This relaxing of the rules by RBC is targeted primarily at wealthy buyers, mainly from China, who have triggered a boom in housing prices in prime neighbourhoods near the University of British Columbia’s main campus. In the last two years, the median price for a detached house in Vancouver’s desirable west side has jumped by 31% to $2.87 million.

The mortgages, on homes ranging in price to up to more than $9 million, were mostly backed by three banks: Bank of Montreal, CIBC, and HSBC Canada. RBC held only 8% of the loans. Interestingly, the announcement of the removal of the loan cap was made by RBC’s director of multicultural markets.

A recent study by Andy Yan, an urban planner and adjunct professor at UBC, shows that two-thirds of the buyers in these affluent neighbourhoods have non-anglicized Chinese names. Realtors who service Vancouver’s luxury real estate market say 80% of the buyers have ties to mainland China.

In his research, Yan discovered the most common occupations listed for the new owners of these multi-million dollar properties was homemaker or businessperson, which he notes are ambiguous job titles and could indicate that money is being earned abroad.

Macdonald Realty, Western Canada’s largest integrated real estate company, looked at 1,500 of its real estate transactions in Vancouver and found that 70% of the properties it sold for more than $3 million went to buyers from mainland China. And only 11% of those that sold for less than $1 million went to buyers in the same area.

One would think that individuals wanting to invest in Canada would be welcome and encouraged. But former Prime Minister Stephen Harper expressed concerns earlier this year, saying that “foreign, non-resident real estate speculation is the reason some Canadian families find home prices beyond their budgets.”

In October 2014, the Canadian Mortgage and Housing Corporation (CMHC) looked at foreign investment in Canada, specifically the impact on condominium ownership. It found that the proportion of condominium units owned by people who permanently reside outside of Canada is 2.4% overall, with the highest rate in downtown Montreal and Nuns’ Island at 6.9%, Vancouver’s Burrard Peninsula at 5.8%, and downtown Toronto at 4.3%.

Canada has few restrictions on foreign ownership of real estate. Those that exist mostly pertain to agricultural land.

Foreigners who plan on spending less than six months a year in Canada can keep a home here without applying for permanent residency. If they buy a property and plan to stay longer than six months they have to apply for permanent residency. If they rent out their property they don’t have to live here but they have to pay a withholding tax of 25%, which, unlike for Canadian property holders is usually taken off the monthly rent.

While foreign buyers are subject to the same fees and taxes as Canadians when buying real estate, they face higher land transfer taxes and different capital gains tax rules when they sell a property. When they take out a mortgage on their property, notwithstanding the higher threshold the big banks are allowing, they generally have to put up a larger percentage of the purchase price as a down payment—typically 35% to 50%, depending on the financial institution. Countering the myth that immigrants show up with bags of cash to buy up Canadian real estate, Yan’s study found that 94% of homemakers had mortgages on their properties.

China, on the other hand, in order to curb rising prices and real estate speculation added new restrictions in 2010, raising down payments and tightening mortgage rules. Foreigners must reside in that country for one year before they can buy property.

How does Canada compare to other countries in their practices with regard to foreign homebuyers?

Many Canadian snowbirds buy property in the United States, favouring the sunshine in California, Arizona or Florida. It takes up to 45 days to secure a mortgage in the U.S. compared to just a few days in Canada. That’s partly because getting a mortgage in the U.S. requires more documentation and verification including details from your passport, creditworthiness and income. Some U.S. banks also charge a foreign national premium that can be 1% to 3% over the standard mortgage rate. As in Canada, U.S. banks require documentation about the source of funds for the down payment. Both American and Canadian law enforcement takes anti-money laundering measures seriously and the major banks are held to very high standards when it comes to identifying the legitimacy of money coming into the country.

Switzerland seems to have the most stringent regulations about foreign ownership. It has imposed quotas limiting the number of houses that can be sold to foreigners except for nationals from European Union countries. Some of the cantons (similar to provinces) restrict foreign property sales strictly to tourist areas or only allow foreigners to buy properties that are already foreign owned. Foreign nationals need special authorization if the property they want to buy exceeds 1,000 square metres, and they’re required to hold it for between five and 10 years.

Tips for non-residents buying real estate in Canada

  • Non-residents can be asked for down payments as high as 50%
  • Lenders will want to verify your income and credit worthiness
  • Foreign buyers pay the same land transfer taxes as Canadian residents; there are tax implications for non-residents selling a property
  • Home insurance is generally required to obtain a mortgage
  • Choosing realtors, lawyers and lenders with experience in foreign ownership can streamline the property purchasing process

Flickr: pnwra