Photo courtesy One Sandy Lane
Barbados is a tremendous place in which to live, work and play because the island has so much to offer its visitors. With unparalleled beaches, beautiful country estates, outstanding golf and polo venues, and some of the friendliest people in the world, it is of little surprise that we are able to attract so many visitors every year. And because so many of them return, and many others decide to relocate here more permanently, the island’s real estate product has developed over the years to such a high quality that it rivals real estate markets around the world.
In our discussions with high net worth international clients that are making an investment in Barbados real estate there is often a consideration to finance such purchases. These clients will typically have their wealth invested in businesses, other real estate assets and investment portfolios that they may prefer not to liquidate and potentially disrupt long-term objectives. Such factors, and others, may create a need to finance the purchase.
The first consideration is always a traditional mortgage because it is a bank product with which most people are familiar and is often found to be a suitable solution to finance these investments. Several local banks offer this type of hard currency mortgage financing and many customers have found the terms to be suitable. However, because the market is rather small, the terms and conditions of these mortgages may be more rigid than what the investor is accustomed to from past experience; the term may be shorter, and the interest rate, and required deposit, higher. We have also seen cases in which specific constraints conflict with the regular monthly payments required to service a mortgage loan. Fortunately when a mortgage does not meet the financing needs of our clients, there are other options to access funding for such a purchase.
High net worth individuals tend to hold portfolios of marketable securities in investment or brokerage accounts. These are typically separate from their business and other investments and, much like a mortgage provides security for a traditional mortgage loan, these portfolios can be used as collateral for borrowing. Known as margin loans, a brokerage firm will assign lending values to each of the securities held in an account and allow the client unfettered access to this value as a revolving line of credit. It is an attractive solution for many clients because of several distinct advantages over mortgages:
- After the account opening process there is no additional paperwork required to disburse the funds.
- There are no processing delays or additional closing costs related to financing allowing for flexibility and quick execution on potential purchases.
- There is no fixed repayment schedule of either interest or principal which allows clients to repay at their convenience, and subject to any other cash flow constraints.
- As a revolving line of credit, clients are able to borrow, repay and borrow again.
- Financing can be accessed for any reason, including the purchase of property.
A margin loan may not be suitable for all investors because borrowing on margin involves certain risks that would not be present in a traditional mortgage. For example, if the securities held in the account decline in value, so would the value of collateral supporting the loan; if there is insufficient cushion the firm may issue a “margin call” requiring the client to deposit additional assets and/or sell securities. Also, because the collateral value varies depending with the riskiness of the securities held, it important that the portfolio is constructed with this in mind. With these additional complexities it is important that clients consult an investment advisor to determine the suitability of this alternative financing.
With high quality real estate products on offer and continued, albeit modest recovery in the U.S. and other source markets, we should continue to see signs of recovery in our international real estate market. We hope that the availability of this type of alternative financing will provide additional support to that recovery.
This article is supplied by the team of Elliott Barrow, Kevin Armstrong and Chelsey Walcott of RBC Dominion Securities Global Limited. It is intended for information purposes only and based on information that is believed to be accurate at the time of writing, and is subject to change. All opinions are solely of the authors, may not reflect the opinions of RBC Dominion Securities Global Limited, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change and past performance may not be repeated. RBC Dominion Securities Global Limited, RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities which are affiliated. RBC Dominion Securities Global Limited is licensed by the Financial Services Commission of Barbados, the Securities Commission of The Bahamas and the Cayman Islands Monetary Authority. ® / ™ Trademark(s) of Royal Bank of Canada used under license.