Why are Mortgage Interest Rates High in Mexico?
If you’re shopping for a property in Mexico and need, or want to, finance your purchase, you may be surprised by the high interest rates of borrowing. As of June 2023, the average lending rate for mortgages in Mexico was 11.18 % and as high as 12% with some Mexican Banks. For the same period the average rate in the US was 6.1% APR. In Mexico, unlike the US, if you consider the fees and costs added to borrowing (such as compulsory insurance, administration or lending fees and early payment penalties) your APR of a loan jumps to 15%.This is the average rate required from Mexicans as well as Permanent Residents of Mexico that are lucky enough to qualify for a mortgage loan.
The same applies to credit card rates. Walmart may have the lowest prices, but their credit card rates are a whopping 49% APR. In some stores they can hit 151%
Bank of Mexico Banxico.org.mx
So why are the rates higher in Mexico? Simple. You’re in another country.
Capital is scarce in Mexico and banks determine the rate of interest based on a balance of concerns: inflationary pressures, risk, and exchange rates. In summary:
- Fewer banks mean less competition, less competition means more fees and higher interest rates.
- Mexico’s Central Bank has been increasing the key lending rates in Mexico to control inflation which hit a 20-year record high of 8.7%in May of 2023. The key lending rate was 11.25% at that date compared with 5.5% in the US at the same date.
- Lending risks are high in Mexico as its institutions are not as developed as those in the rest of North America. It can take years to realize on a security such as a mortgage which makes it the “cream” of financing products in Mexico. Only those that don’t need to borrow can qualify for a mortgage loan.
Despite the high interest rates, here are four good reasons to buy in Mexico and borrow for that purchase.
A growing number of North Americans are buying property in Mexico because of the high property values in the US, despite the higher mortgage rates in Mexico. A medium size home in California or Vancouver can cost more than $600,000 whereas in Mexico the same property costs closer to $250,000.
Secondly, despite inflationary prices in all of North America, it still costs less to live in Mexico than it does elsewhere. By as much as 30% cheaper for the products composing the Consumer Price Index (food, fuel, health etc.).
And the good news continues. According to a recent article in Mexiconewsdaily.com, Mexico housing prices are up nearly 12% over last year. Mexico’s high inflation has been pushing construction cost for a new housing. The cost of the materials is 50% higher than it was during the same period last year. Despite this, demand for housing is remaining high, including for investment property and this upward trend is expected to continue beyond 2023. In particular in Baja California (Cabo San Lucas), Quintana Roo (Cancun, Playa del Carmen) and Sinaloa which saw the highest annual growth in house prices, varying from 17.89% in Baja California to 17.1% in Quintana Roo. The increase in pricing has been driven by high demand by foreigners for property in popular locations. in particular by digital nomads.
Finally, interest payments are deductible against gross income in the US and against rental income in Canada, making the cost of borrowing less painful. This itemized deduction allows homeowners to subtract mortgage interest from their taxable income, lowering the amount of taxes they owe. This deduction can also be taken on loans for second homes as long as it stays within IRS limits. Therefore, whether or not you intend on renting the property, the cost of the interest can be deducted from your personal income tax thereby making it a negligible cost (ie. paying $10,000 in interest and debuting $10,000 from income tax = negative cost of borrowing).
MexLoans can be your financial partner for borrowing in Mexico. We provide mortgage financing to US and Canadian Citizens at the lowest rates and best conditions on the market. Visit www.MexLoans.com.mx and try our mortgage payment simulator to see how much a loan will cost you including projected closing costs for your purchase. Apply online and get pre-approved, without cost or obligation, in record time. We finance existing and pre-construction properties.
Other lenders in Mexico charge an Application Fee which can be as high as $250.