Part of what we do at AKARAT is what we refer to as “Real Estate Planning” with our clients. We typically start with a meeting to understand our clients’ needs and capabilities and explain the different options within the real estate market that might fit their current situation and future goals. Depending on the complexity of the situation, we would also bring to the table professionals in the mortgage, financial planning, accounting and legal areas to complement our work.
One segment of clients that we deal with and advise are foreign buyers. Some of them have children attending university in the Greater Toronto & Hamilton Area (GTHA). The typical advice for a family that is planning to send their child/children to study in the GTHA is to purchase a house/Condo rather than spending 4+ years paying for rent or the dorms. This makes more sense of course to those with more than one child going to university within a 10 years period for example. The numbers, pre the recent announcement, for a typical one bedroom in downtown Toronto would be in the range below:
- One bedroom condo in downtown Toronto rents for $1,700.
- The same one bedroom unit sells for $450,000
- A foreign buyer with solid income/employment, etc. should be able to secure a mortgage at 35% down payment
- Total purchase cost will be around $170,000 (35% of property price plus purchase costs).
- Monthly expenses $1,650
- Assuming 4% annual appreciation in property price, and selling it after four years (completion of studies), the savings vs. rent will be around $57,000
So if the student/parents can afford a $170k down payment, such an option might be attractive to them.
TODAY, after the announcement and the implementation of the 15% Non-Resident Speculation Tax (NRST), the numbers still make sense BUT the capital requirement became higher. For the same example above, the purchaser will also need to pay 15% of the purchase price upfront which will be refunded from the government in two years plus interest. Therefore, the total purchase “initial cost” will be $227,500 ($160,000 + 15% of $450,000).
All in all, in the past, one of the challenges we had with foreign non-cash buyers was to secure a mortgage at the lowest down payment possible which typically ends up being 35% with some exceptions. Today, not only do we have to deal with the mortgage challenge, but also with the “extra” 15% required at the point of purchase. Some foreign buyers cannot afford it even cash buyers, others don’t want to take the risk (for example they might not qualify for the refund if their child decides to leave school after one year), and some simply don’t feel that they will ever get the refund!
I guess it is simply a different marketplace today which we will adapt to. The numbers are still attractive for this segment. If we revisit the example above, one can look at it as putting down 50% of the property price as initial investment, securing a 65% loan on the property and getting a refund of 15% of the value plus interest in two year. The proposition still stands strong, the numbers just changed.
Mohammad Abusaa (M. Abusaa)
Real Estate Broker of Record & Mortgage Agent
D. 416 825 7775