How a Mortgage Can Preserve U.S. Home Value

As a Canadian, purchasing real estate in the US is a big deal with many things to consider. There may be many motivations behind purchasing real estate. This can include escaping winter months, diversifying real estate holdings, or even part of your long term goals to eventually move to the US. However, there is one important consideration you may not be considering. By purchasing US real estate as a Canadian, you are essentially taking a long position in the US dollar. This means that if the US dollar depreciates in value while the Canadian dollar appreciates, your home will lose value and can affect any future plans you may have. With the US dollar at all-time highs, it would be a good idea to try and preserve this value and avoid any extreme losses in home value.

Myth: “No Debt is The Best Debt!”

Luckily, there is a strategy that can be pursued in order to hedge this risk and it has to do with how you choose to finance your home purchase.  Now you may have received advice from your parents or grandparents or even friends with regards to debt. They have probably said things such as, “Avoid debt at all costs, I just got out of it!” and this is not necessarily bad advice. Things such as credit card debt or financing options on consumer goods such as furniture may come with very high interest rates that can leave you in a rapidly sinking hole you can’t climb out of. However, not all debt is equal, and if you’re smart, you can use debt to your advantage; why else would it be known as leverage?

Imagine this:

Current exchange rates for US$ are 1.2 Canadian.

You have worked hard all your life to save $75,000 US in cash towards a US home purchase worth $90,000 CAD. After purchasing the home, exchange rates fall to 1.1 Canadian. As a result the value of your home dropped from $90,000 Canadian to $82,500, a loss of $7,500.

This can be avoided by opting for a mortgage instead. For example if you put down 25% cash down and borrowed 75%, the losses would be far less. To be exact, the losses would be only $1,875 and much greater if the original price of the home was more.

By choosing to finance the home with a mortgage, you can essentially hedge your investment by whatever percentage you choose to borrow. However, this does not come without some downside. If the reverse was true and the original rate was 1.1 Canadian, you would stand to lose on some potential gains from the rate rising to 1.2. As a result, the amount you choose to borrow should also take into consideration how much you want to participate in the gain should the exchange rate rise.

A good consideration in making this decision is historical exchange rates or what the Bank of Canada plans to target for the exchange rate for the long term. This information can be found in press releases by the Bank of Canada. For example, if the Bank of Canada plans to target an exchange rate of .75 over the long term, then if the US dollar is above 1.25 it may be a good idea to hedge for downside risk. If it is lower, you can consider borrowing less to participate in more upside potential.

A useful tool to calculate your payoff or loss potential is to use a two-way table in Microsoft Excel there are many tutorials online as to how to go about this, however, for your convenience we have created a basic one for you to get a rough idea as to your potential gains and losses. All you have to do is send an email to [email protected] with the subject header “Mortgage Hedging Tool” and we’ll send it to you.

Saving money on currency exchange

As a last tip, try to avoid banks for foreign exchange services if you’re planning on purchasing a home or selling one. Banks typically charge substantial mark ups when exchanging your currency which can equate to thousands of dollars on large amounts. Banks charge large mark ups due to the nature of their business. To guarantee that they make a profit and to break even on many of the services they offer, they usually charge much higher than the actual cost of foreign exchange.  This comes at the expense of everyday consumers who just don’t know any better. Be sure to research other options to find the best solution for you.

Brought to you by Knightsbridge Foreign Exchange, a currency exchange company that helps Canadians get a better exchange rate than the banks. www.Knightsbridgefx.com