Being able to buy a home in Ontario depends on your financial situation, and many Ontarians are hard-pressed to find ways to obtain their mortgage. However, in some exceptional cases, the buyer and seller of a home can agree to allow the sale even though the buyer does not have enough funds.
This is called a vendor take back mortgage (sometimes called seller take back mortgage), and it’s one of the ways Ontarians can potentially buy a home outside of their range of lending and financing. However, there are various factors to consider when selecting this option, and it’s important to know what you’re getting into. Read on to learn more about vendor take back mortgages and if they’re right for you.
Understanding why vendor take back mortgages happen
The vendor take back mortgage, also known as VTB mortgage, is a unique arrangement that happens when a buyer wants to purchase a property outside their financing amount, and the seller is willing to work with them to make the sale happen.
When VTB mortgages are established, the seller still owns equity in the property, which the buyer will pay back over time with additional interest. This interest is what gives VTB meaning for sellers – they have an opportunity to earn more than the original asking price for the house if they have the patience to wait for it.
On the other hand, the buyer may be recovering from a rough patch in their financial history but is currently stable and earning enough to make mortgage payments reliably. Also, some buyers don’t want to give up on their dream homes outside their current affordability.
As such, vendor take back mortgages offer a great way to help both sides get what they want, provided they find a lender willing to set one up.
Vendor take back financing
Most vendor take back mortgages are used to supplement a traditional mortgage. Buyers mainly turn to VTB mortgages because their mortgage lender isn’t able to lend enough to purchase the seller’s property; the lender is still paying for the bulk of the purchase price, which will be under a different rate and set agreement terms from the vendor take back mortgage.
Because of this, the seller will usually ask for a higher rate than the mortgage lender, because they know the buyer is taking on two loans at once, and they are shouldering added risk through a VTB mortgage agreement.
Benefits of a vendor take back mortgage
Let’s look at some of the specifics benefits and considerations of a vendor take back mortgage. These will be split between the buyer and seller because they each get different things out of a VTB mortgage.
- Additional options for financing outside of your credit limit/financial history allowance
- The chance to secure your dream home
- An opportunity to build good credit/income history
- Selling your home quicker
- Able to sell the home Interest earnings over time on repayments
Factors for buyers
As we explained earlier, a vendor take back mortgage involves taking on two loans at once. This is likely to add significant weight to your financial responsibilities, so buyers have to be sure they will be in a position to make steady, reliable payments to both loans to remain in good standing.
A vendor take back mortgage can also be used to finance a down payment since many homebuyers have the standing to finance the purchase amount fully but not the down payment. In this case, the seller would transfer the down payment funds to the buyer, who uses them to pay the down payment. The lender would then organize a vendor take back mortgage that involves two loan amounts for the buyer to pay back.
Selling your property also becomes difficult within a vendor take back mortgage, because you do not fully own the home. You will have to consult your seller and the mortgage lender to sell the house, and things can get pretty convoluted. Therefore, it’s best to use a vendor take back mortgage for a home you plan to keep for a long time.
Factors for sellers
While vendor take back mortgages are generally more beneficial to sellers, there are some potential drawbacks that you need to be aware of. For one, remember that you haven’t actually sold your home entirely in a VTB mortgage – a portion of the balance is still in your name, and the buyer is paying the mortgage off on the rest of the balance.
If the buyer either wilfully refuses to sell or does not have the means to make mortgage payments, the responsibility falls back on the seller. If you are not financially prepared to take on mortgage payments, it can cause a lot of headaches down the road. Sellers have an option to go through a legal venue to prepare an agreement that protects them from excess loss, but the fees for such an agent can be expensive in and of itself.
Ideal for real estate investment
The vendor take back mortgage is a unique agreement that carries significant considerations for both the buyer and the seller. So who should go for this mortgage?
Investors looking to leverage their properties and real estate will find a vendor take back mortgage to be a good way to generate income. Property investors usually own additional homes in full, and when selling these properties after they’ve appreciated, make a significant profit.
Due to a portion of the amount being received in monthly payments, those who sell their properties through vendor take back mortgages will save a significant amount of the income tax during the sale, which is a great reason to choose this option.
Vendor take back mortgages offer a unique solution for buyers and sellers with specific circumstances and want to make a property transaction. There are many benefits and drawbacks to this mortgage option, and it can’t be easy to know if it’s a good choice for you. But, don’t worry; Mortgage Maestro is here to help!