Financing Options in Mexico Aren’t Great
Although there are lending companies looking to expand their businesses overseas, especially since rates are very high in the United States, the financing options in Mexico aren’t great when you compare rates and fees.
Most Mexican Loans are going to have rates of 9.99% or higher. The fees for Mexican nationals and legal residents of Mexico are low keeping the APR or annual percentage rate down. APR is the way to measure the cost of the loan over time and closing costs are blended into this measurement.
High Rates and Closing Costs for Foreigners
APRs are really high for foreigners wanting bank loans for Mexican properties. The lenders charge additional points or percentages for loan origination, etc. This makes the APR go to 12.5% on most Mexican loans taken out by foreigners. For good reason, because these types of loans are much riskier and complicated to process for the lender.
Short Loan Terms Make Payments Higher
Another factor that makes Mexican bank loans less attractive is the shorter terms which result in higher monthly payments.
We are not in Kansas anymore; It’s Not Like Back Home
Obtaining a loan in the USA or Canada is much easier, they have lower down payments, lower rates, longer terms, and therefore lower monthly payments. This creates a much better probability of positive cash flow if you’re renting the property out.
Who is a Good Candidate for a Mexican Bank Loan?
People who plan to live in Mexico full time and would rather pay their own mortgage than someone else’s. They have enough money to put down, probably 40 to 60% so that they finance a smaller amount that will generate a reasonable monthly payment. They make good enough income to pay down the mortgage faster thus lowering their effective interest rate.
It Makes Sense If You Have High Income and Low Savings
Another good candidate would be someone who has really good disposable income, the income you have after all your expenses, and doesn’t want to tie up their cash. They can pay the loan down fast with their extra income and lower their effective rate to more acceptable ranges. They pay a 20 year loan off in 5 to 10 years for example, taking that 12.5% APR and shrinking it down to half perhaps, maybe in the 6 to 7% range.
Who is NOT a Good Candidate?
Someone who needs or wants to rely on the rental income to cover high mortgage payments. This is risky because there could be slow months with rentals and they would need to come out of pocket putting them in a negative cash flow position. This type of person might not have high disposable income and would feel the stress of having to come out of pocket.
Developer Financing
Developer’s that offer financing usually only give you 5 years with rates of 8 or 9% The fees are low so the APRs stay about the same. This can be a good option for people who don’t want to tie up too much cash. Some developer’s don’t title the property until the debt is fully paid off which could be advantageous if an owner wants to sell the property before titling to avoid paying the 8% to 9% closing costs associated with deeding a property in Mexico. See Article about Reselling Before Titling
Conclusion: The Riviera Maya is Mostly a Cash Market
Most savvy investors will come to the conclusion that it’s better to get financing back home or use self-directed IRAs than to get a Mexican Bank Loan. Even with the higher interest rates that they have been experiencing back home, it’s an easier process and they can refinance those loans possibly when rates go down.
If you need the cash to take advantage of an amazing opportunity and can pay the loan off quickly, financing in Mexico can make sense, but you are most likely going to find cheaper money through other avenues.
Everyone’s individual circumstances vary so it’s best to book a call with an expert to discuss your financial situation to see if Financing in Mexico would be a good fit for you.
