Paradise on Sale

Mortgages available in Mexico

 

October 2008

by P. Montry – pjm@mortgageformexico.com

 

Quality of Life and Abundance of Choice

 

For those in search of an affordable place in the sun by the sea, the change in Mexican law allowing foreign ownership and control of beach front property was the beginning of a dream turning to reality.  This constitutional change to the “restricted area” has resulted in significant growth in coastal resort areas.  The growth is especially evident here in Vallarta and the nearby state of Nayarit, which remain among the fastest growing areas in Mexico.  

 

The reasons for demand, specifically here near Banderas Bay, are obvious:  beautiful beaches, dramatic ocean views, year around tropical climate, and the Sierra Madre mountains.  Mexican coastal real estate is surprisingly affordable compared to similar beach front properties in the U.S. which makes owning a piece of paradise a realistic possibility for many.

 

The waking dream continues. With this surge of growth and influx of residents have come the amenities associated with some of the finest vacation destinations in the world.  With first class resorts and activities, to fine cuisine, to new shopping malls and big box retailers, and even new movie cineplexes, sometimes it’s hard for visitors to recognize Mexico.

 

In meeting this demand, there has been significant new residential developments over the last several years, and pre-construction sales have become a larger part of the real estate market in Mexico.

 

Construction continues taking place all along the bay and stretches northward along the coastline now referred to as Riveria Nayarit. Residential options are indeed tremendous, especially compared to just a couple of years ago.  Developers have created everything from modern to traditional, including luxury homes with private beaches, South Beach style high rises, mountain settings with bay views, and urban condominiums in the heart of downtown steps away from all of the activity of the malecon/boardwalk.  Even eco conscious tropical settings have recently been crafted.  

 

The affordability of new quality construction and architectural design, with accessibility via direct flights from many U.S. cities, makes Vallarta a top destination for vacation residences and retirement.  Negligible property taxes, and favorable labor rates make even domestic staff an affordable luxury.  Being “South of the Border” increasingly represents quality, and moreover quality of life.

 

It is not surprising that in many instances during an initial visit, vacationers are struck not only by the quality of life, but the amount of investment options, and begin to consider the possibilities of purchasing their own residence or retirement home. 

 

Credit Crisis and Opportunity

 

By now we’re all aware of the turmoil in the financial markets related to sub prime lending in the U.S., and the overall systematic effect.  Many new development projects in Mexico have come on line as housing prices in the U.S. began faltering.  As values in the U.S. have fallen, the pricing and terms for new construction in Vallarta has become increasingly more competitive.  The choices, pricing, and return potential have clearly swung in favor of the buyer. 

 

The shake out of unrealistic lending in the U.S. has understandably caused fear, and Mexico is not immune.  However, the overwhelming majority of transactions for vacation homes in Mexico have been done in cash.  It is important to note that cash doesn’t necessarily mean without debt, and that in many cases purchases in Mexico were supported through use of equity credit lines of U.S. real estate, so there will likely be a softening of demand in the short term, but no “collapse.”  The historic lack of financing has kept values realistic, as was the case in the U.S. before lax lending standards became the order of the day.  

 

From an investment perspective, Mexico continues to have all of the attractions which created this boom in the first place, and people will continue to gravitate to this tropical paradise.  The difference now being that at this moment there is more and better quality inventory with opportunities at bargain prices.  This environment, coupled with recent availability of conservative financing options provides an exceptional opportunity for buyers.  Additionally, many properties in resort areas have rental income potential which improves, and in some cases generates positive cash flow in connection with a mortgage loan.

 

Financing and the Upside

 

Mortgages are available in Mexico, and remain available for quality loans despite the credit crisis. 

 

Fortunately, mortgage lending in Mexico is a recent occurrence, and banks have taken a conservative approach by typically requiring ~30% equity.  Historically the fluctuation of the peso has kept long term interest rates high, and home lending virtually nonexistent.  However, a continued stable Mexican economy and growth in demand for vacation homes has created a market for financing, and specifically for foreigner buyers.  Recently many international lenders have begun to offer dollar denominated loans with Mexican property as collateral. 

 

New lenders continue to enter the market and competing financing products being offered are driving rates and terms to levels competitive with those in the U.S. and Canada.  For example, traditional 30 year terms are available in the 8.5% range.  Better rates can be achieved through shorter loan time periods, such as a 20 year fixed rate in the 7.5% range. 

 

If anything, the historic lack of financing has offered support to the market.  There have been virtually no foreclosures, and there don’t seem to be any desperate sellers, save for perhaps some developers who require pre-sales to fund construction.  For this reason alone, one might consider the value of having a lender in the mix to insist that the contract and loan is collateralized before putting any capital at risk.

 

Whereas the initial surge in coastal property sales occurred after the change in Mexican law, the next stage is poised with a conservative level of credit availability.  Recent access to reasonable levels of credit at attractive rates has increased the number of buyers in the marketplace.  To put the possibilities in perspective, one can imagine the limited number of vehicles car manufacturers would sell without financing.  Financing will continue to be available, it will simply have to be supported by sound values with good underlying credit characteristics – shocking!  Values for loans are supported by U.S. style appraisals.  Furthermore, the recent presence of lenders providing the availability to borrow against Mexican vacation properties adds credence and confidence to the long term viability of the market.

 

To reiterate, lenders in Mexico require significant equity.  And as should be the case, documented income, a quality credit rating and reasonable levels of debt are required to support a loan. While rates in Mexico are slightly higher than American and Canadian mortgage rates, the option to leverage real estate assets in Mexico has proven to be a strategic advantage, as in most cases the interest is tax deductible.

 

If you’re considering buying your own piece of paradise in Mexico, financing can be an effective tool worth considering.  While borrowing was clearly overdone in the U.S., leverage in a strategic financial planning sense can provide a better return and a path to ownership for amounts in excess of ready cash, but within the confines of affordability.  If you’d like to find out more about your ability to access to a loan for real estate in Mexico, you will find more information at www.mortgageformexico.com