One Foreign Property Market Where You Can Borrow To Buy
Kathleen and I are considering a further real estate investment in Panama. Specifically, we’re thinking of buying a house in Panama City that could work for our office here long term. So we’re looking at financing options.
Panama is one country where a foreigner can get a local bank mortgage for the purchase of real estate, even as a non-resident.
The question you have to ask is whether or not you want one. Is a Panama mortgage worth the cost and effort?
Lending terms in Panama aren’t the same as you’re likely used to. You won’t get a 30-year, fixed-rate mortgage, for example. The longest term you’re likely to find is 25 years, and the interest rate will vary in some way.
The longest fixed term you’ll find is five years.
That said, a variable rate doesn’t necessarily vary. There are no guarantees, and you certainly can’t predict whether or in which direction your rate might adjust, but I can tell you that, while the interest rate for our current mortgage (for a rental investment property we own) in Panama is variable, it hasn’t changed once in the five years we’ve had the loan.
In addition, mortgages in Panama come with a small catch. As part of the lending process, you’ll be required to get a local life insurance policy that would pay off the loan if something were to happen to you. The life insurance is an extra expense. But the real issue is the potential limit on the term of the loan you’ll be eligible for, as you can get a mortgage only for as many years as you can get a life insurance policy.
This isn’t unique to Panama. Mortgage life insurance is a typical requirement in most countries, but the limitation created by the ability to get life insurance can catch older buyers from North America off-guard.
In Panama, the typical life insurance company will cover you only until age 75. Therefore, you can get a mortgage only to age 75. So a 65-year-old buyer would be able to arrange no longer than a 10-year term from a bank.
I was told a few years ago about someone who was able to get a life insurance company to cover him in Panama until age 80, meaning this buyer got an added five years on his mortgage term. In general, though, life insurance companies will cover you only until age 70 or 75.
Another factor in Panama that can limit the amount of the mortgage a bank will give you is the limit that many banks now set on the per-square-meter value they will lend on.
For example, if you’re buying a house or an apartment in Panama City, Global Bank will limit your loan to no more than US$1,300 per square meter. That is the amount on which they will base their 80% loan-to-value calculation.
If you want to buy a house for US$1,400 a meter, the best you’ll be able to manage is a loan of US$1,040 per meter (80% of US$1,300). You’ll have to put down US$360 per meter, or almost 26% of the purchase price to secure your “80%” loan.
The good news is that you can apply for pre-approval from a Panama bank before you start making property offers. This way, you’ll know for sure what you can afford to spend.
In the past, an alternative was to take a second mortgage out on a piece of property you owned in the States. This was a popular and common strategy during the boom, when U.S. banks would lend to anyone with a pulse. Today, it’s not a realistic option in most cases.