A vendor take-back (VTB) mortgage is a type of mortgage in which the seller offers to lend funds to the buyer to help facilitate the purchase of the property. A vendor take-back mortgage often represents a secondary lien on the property, as most buyers will have a primary source of funding other than the seller.
They make homes and property available to those who may not ordinarily be eligible, such as recently-discharged bankrupts, young people and recent immigrants who don’t yet have a credit history.
The Canada Mortgage and Housing Corporation (CMHC) defines the vendor take-back mortgage “where the vendor rather than a financial institution finances the mortgage. The title of the property is transferred to the buyer who makes mortgage payments directly to the seller. These types of mortgages, sometimes referred to as take-back mortgages, can be helpful if you need a second mortgage to buy a home.”
In most cases, the vendor take-back mortgage is offered at a rate below market value. This makes the option more attractive for the buyer, which can translate into a fast sale for the seller because another source of financing is being offered. It allows a buyer to negotiate terms they may not be able to obtain with the bank. The term of the mortgage, whether you can pay it back without penalties, the interest rate, these things are all negotiable.
The advantage to buyers of so-called vendor take back mortgages is that you can end up with a bigger mortgage than a bank is willing to provide. Sellers also find it useful because it provides extra revenue through the interest they can charge which is often at a higher rate than the banks give. This type of mortgage can also help promote the sale of property by making it attractive to buyers who are not eligible for a full bank mortgage.
The risk, though, falls mostly to the seller. If the buyer defaults and the bank holds the primary mortgage, the seller could lose their investment and an expensive and lengthy legal fight could ensue. Also, because it is a mortgage, the seller won’t receive the principal right away and could be tied to the deal for several years.
Here are six important reasons to remember when considering a vendor take-back mortgage:
- Easier to Qualify: Real estate buyers can use a vendor take-back mortgage to purchase property that would be beyond their limitations going through traditional funding.
- Lower Down Payment Means Higher Return On Investment: Real estate buyers who are looking to buy multiple rental properties don’t want to use their own capital for a 20% down payment. Vendor take-back mortgages allow them to buy multiple properties without tying up a large amount of money in each property and thus increasing their return on investment for each property.
- Easier to Sell: Vendor take-back mortgages actually speed up a sale because they provide a benefit for both the buyer and the seller. The seller makes a quicker sale because there’s another source of financing for the buyer, and the buyer can get a vendor take-back mortgage at a rate below market value.
- Tax Deferral: Because the seller isn’t receiving 100% of the sale cost up front in one fiscal year, they have lower capital gains taxes. This is an incentive for a seller to agree to a vendor take-back mortgage.
- Good Interest Rates: Real estate buyers will find that vendor take-back mortgages are cheaper than any other private money offered for an investment. The seller will also find that this is a solid investment. The interest that they’ll get by participating in a vendor take-back mortgage is several points higher than what they’d receive by investing that money in a GIC or savings bond.
- Lower Fees: Real estate buyers who want a higher ratio (in excess of 80%) from a conventional lender will be hit with CMHC fees and premiums or will see 2 to 4 points on their loan value. A vendor take-back mortgage can help you avoid this by being able to make a larger down payment than you otherwise could have managed.
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