Friday Mortgage Round Up: May 25th, 2012

Foreign Property Investors: Good or Bad?

Back in 2010, Australia laid down the law and prohibited foreigners from making purchases in their country – the result of the damage speculation and tax evasion had caused to the housing market. Now, we’re seeing some of these issues on the home front – and some are suggesting that Canada follow suit!

With the state of the global economy, Canada is really seen as a financial safe haven to foreign investors – especially when you consider the affordability of a Toronto residence vs. a comparable in Paris or London.  Now, not all developers welcome foreign investment, however one of Toronto’s new luxury hotel condominiums (Four Seasons) estimates that 30 to 40 per cent of buyers have not been residing in Canada.

Flipping for a Pretty Penny

So how does this all work exactly?  Foreigners enter into an agreement to purchase a condo unit with a 5 per cent deposit (not to be confused with a down payment).  What this does is grant them the right to purchase the unit in the future at an agreed upon price, today.  In the investment world this is known as a futures contract.  Many developers allow you to assign this right to another investor; therefore if prices inflate, foreign investors just flip the unit for a profit.

So for example, a foreign investor will put down a $15,000 deposit (5 per cent) to obtain the right to purchase a $300,000 condo upon completion at a future date.  However between now and then, the condo market heats up and comparable units are now going for $400,000.  So, when opportunity knocks, assign your right to someone else and make a quick $100,000!

What’s the Problem?

The original investor is happy to flip and make a quick profit.  The new holder of the right is happy.  And the condo developer is still getting paid … Seems like a no-lose situation, right?  But when rights are bought and sold over and over again before the building is complete, prices inflate and the whole transaction becomes more costly to Canadian citizens.  This all adds to the interesting debate in the Toronto market as to whether or not there is a true housing bubble, whether it will burst or if we’ll have a soft landing.  The buying frenzy would most certainly contribute to the pressure in the so called “bubble”.

In all honesty, if everyone had the cash flow to make this maneuver we would all be doing it.  I mean, you’d be silly not to.  The real problem lies in the taxation of such a transaction.  The paperwork for these exchanges is kept in-house, so at times there are no T-5s issued to the speculator or to the CRA.  Pretty interesting considering the opposite holds true in the derivative and stock market where taxes MUST be paid on the $100,000 trading profits. These should be claimed and taxed rather than vanishing in the paperwork.  The only true taxes paid are by the end user if they make a capital gain down the road.

Under CRA rules, foreigners making Canadian-sourced income are fully taxable by the federal and provincial governments by 46 per cent (in Ontario and BC) which would bring the total tax bill to $46,000 on the exemplified $100,000 profit.  The unpaid taxes could be quite significant if you consider the average 20,000 condo units that have been sold each year for the last 5 years.  How many condo developers allow purchases to be made by foreign investors and then flipped?  Might be worth looking into!

On the Flip Side (Pun Intended)

Call me crazy, but I try to see the good in everything.  Sure, the wealthy individuals from overseas likely have private funds and may not actually require a mortgage in Canada.  But if they do, the rule of thumb is they need to have some skin in the game – 35 per cent to be exact.  And to be approved most institutions will need to see some paperwork and domestic income, either in the form of obtaining landed immigrant status or a valid work permit.  Otherwise, you’re on your own!  So we are doing our due diligence in qualifying foreign individuals for mortgages and ensure that there is little chance of default.

What’s more?  Consider a modest 20 per cent (Four Seasons quoted 30 to 40 per cent) of condo unit holders being international.  Think about how that contributes to the Canadian economy and the jobs that are created to support the demand for real estate!  If anything needs to change, perhaps it should be the monitoring of these transactions involving foreign investors and the taxable income that has not been harnessed by the Canadian government. Week in Review

Six out of the 10 rates that I cover on a weekly basis as part of the best mortgage rates page changed over the last week.  Don’t worry, only one rate saw an increase!  The biggest decrease was to the 5 year variable rate mortgage, which decreased by 15 basis points and sits at 2.75 per cent.  The biggest rise was to the 3 year variable mortgage rate which increased by 20 basis points and sits at prime (3 per cent).

Do you want to know when the best mortgage rates change?  Be the first to know and sign up for will e-mail you a daily digest of the mortgage rates that have changed in your area!

Continuing to win the searched popularity contest among visitors is the 5 year fixed rate – nearly half (43.2 per cent) of our guests are looking for a competitive rate.  And still holding strong as the second most searched rate is the 5 year variable rate (24.9 per cent).


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