How To Finance Your Dream Home In Paradise
A reader wrote in this week to ask about bank financing in Colombia. He wants to buy a place of his own in Medellín for retirement. He has some capital but not enough to fund the purchase of an apartment… so he needs a loan.
Unfortunately, in many countries, including Colombia, it isn’t possible for a foreigner to borrow money locally for the purchase of real estate, even if you’re a legal resident. From the bank’s point of view, a foreigner, even a foreigner who has established residency, is a flight risk. You have no real connection to the country and could up and leave at any time. Banks don’t want to take that chance.
In Medellín last week, this topic came up during a meeting with my local attorney. He doesn’t understand why Colombian banks won’t lend to foreigners wanting to buy real estate in Colombia, and he’s taken the issue to several local bankers, explaining to them that they’re leaving money on the table by not lending to foreigners. Their reply in short was: “Oh, well… we don’t need the business.”
Banks in Colombia are conservative in general. Not only do they lend only to Colombian nationals, but they lend only up to 70% (maybe 80% in some circumstances) of the purchase price of a piece of real estate. And, it seems, they don’t see any reason to be more aggressive or open in their policies. They’ve got all the business they can handle, they say. The Colombian middle class is growing, as is the country’s economy overall. Foreign buyers make up only about 2% of the property market in this country.
What are the foreign buyer’s options? Really, you have only one—private financing. Some local entrepreneurs are offering mortgage lending in Colombia on a small scale, but you have to have an introduction to these guys, and their pools of available funds are limited. Realistically, therefore, the foreigner wanting to finance the purchase of real estate in Colombia has to negotiate terms with the seller directly.
This means you need to be flexible. If your property requirements are strict, you’ll have a hard time finding the property you want available from a seller interested in talking terms.
Your most likely lender will be another foreigner who doesn’t need 100% cash at closing. Typically a local seller needs the cash from the sale to purchase his next home. If that’s not the case, a local seller is likely to take the same position as banks in this country—that is, that financing a sale to a foreigner is too risky. You could walk away from the mortgage payments at any time, and what recourse would they have then?
When you find a property available from a seller willing to finance, don’t expect a 30-year mortgage at 4%, for example. The terms aren’t going to be anything like what you could get from a bank in the United States. A seller willing to finance typically does it over a shorter period and at a higher rate of interest than might be possible with bank financing. A common term would be 3 to 5 years with payments amortized on 20 years. Interest rates could be in the double digits.
Don’t despair if you need a loan to buy your retirement home overseas. While Colombia is a challenge, other countries do offer bank financing to foreign buyers. Although banks in many European countries have eliminated or scaled back lending to foreigners, especially non-resident foreigners, in recent years, you still can find banks in France, Spain, Portugal, and Italy willing to lend to you if you qualify.
Still, though, you won’t find 30-year fixed-rate loans in Europe as you do in the States. In fact, you’ll not see many fixed-rate loans at all. Mostly you’ll find variable-rate loans with 20- or 25-year terms. As a foreigner you’ll have to put down at least 30%, more likely up to 50%. If you’re taking a foreclosure property off a bank’s books for them, they may be willing to give you a better deal than they would on another property.
In the Americas, foreign property buyers can obtain mortgages in Panama, Belize, Mexico, and even Nicaragua if they can find the right bank and qualify. Again, terms won’t be like those in the States. Interest rates in Belize can be as high as 11%. Panama interest rates are more reasonable at 6% to 7%, but banks are less likely to lend to a non-resident than a resident foreigner.
Continue Reading: The Property Market In Cali, Colombia