Mexico Interest Rates Remain the Same While US Mortgage Rates Fall
By Terence Reilly, MEXLend Mortgages (originally published in the Vallarta Tribune, March 2009)
As interest rates in the US decline, many people are curious as to why the rates for mortgages in Mexico remain the unchanged. The short answer is that the United States and Mexico are two different countries with two sets of circumstances. Many people think of Mexico as a southern extension of the U.S., but it is not. If Swiss nationals can buy property at a 1.5% interest rate in Switzerland, would they be able to match that rate on a purchase in the US? The answer is…of course not!
That’s the simple answer but there are several reasons why US cross border lenders set their rates higher. First, these loans are for second homes only. If you were to apply for a second home mortgage right now in the US, you would pay a premium. If the 30-year fixed rate were 5.5% on a primary residence, the bank would add one or two points (depending on the bank) to compensate for the added risk of a second home, bringing your rate in the US for a vacation home up to 6.5%-7.5%
Why are second home mortgages more expensive?
Lenders know that if a borrower gets into financial trouble, he or she will protect their primary residence and dump the vacation home. It’s that simple.
Many borrowers in the U.S. cheat on their loan applications, stating that their second home is a primary residence. If found out, either through mailing records or tax records, the bank will notify you that you are in non-compliance with the terms of the loan and will force you into a higher interest rate. But because cross border US dollar financing in Mexico is ONLY for second homes, there is no way to cheat on the loan application by calling it your primary residence,.
Further, if your lender is a U.S. entity, they are conducting business in a foreign country which adds additional risk and cost. While purchasing in Mexico is a safe investment, if a borrower were to default, the costs for the U.S. lender to hire Mexican legal council to coordinate a foreclosure and to pursue collection are much higher and time consuming.
In short, the greater the risk is perceived by a lender, the higher the interest rate.
When considering a mortgage in Mexico, note that the average Mexican lender is charging 10% to 14% interest on their mortgages. With cross border lending, US citizens and Canadians are getting a huge break on the current interest rate of the country in which the property is located.
Also, there is no reason or incentive for lenders to match the artificially low rates that are being offered in the U.S. The current low interest rates in the U.S. are an effort to prop up an ailing economy and to aid the housing industry. These are not normal interest rates and have not been since the year 2000.
Some people may consider the option of obtaining a home equity line of credit or cash out refinancing on their primary residence in Canada or the US to take advantage of lower interest rates. However, with real estate values plummeting, is it worth the risk of getting into an upside-down position on your primary residence to save a few interest points? In the majority of cases, it is not. It is far more advantageous and conservative to obtain a loan on your Mexican property and use it as collateral while leaving the equity in your primary residence intact.
The great news is that US dollar loans are available and are readily accepted in Mexico. They allow the borrower to leverage their investment and keep more cash on hand. In the current economic climate having extra cash on hand and a lending partner for your Mexico real estate investment is a winning situation.
MEXLend, Inc. is a Mexican mortgage brokerage that currently represents 20 different lenders offering more than 300 different loan options in Dollars and Pesos for buyers looking to purchase vacation or investment property throughout Mexico. MEXLend can be reached at 322-132-7991 (in Vallarta), 917-779-9061 (while in the US or Canada) or go online at www.mexlend.com.
