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Disclaimer: This article on Vendor Take-Back Mortgage is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.
Last year was marked by some large changes in the real estate market. First, there was the boom in early 2022, where prices reached record highs. Homes in Hamilton rose to an average of over $1 million. Since then, the market has cooled as interest rates continue to rise and the economy struggles.
If you are looking for a new home, you may have heard of vendor take-back mortgages. These were popular in the late 1980s and early 1990s. However, our offices have been seeing more of them recently.
In this article, we will outline what a vendor take-back mortgage is, how it works and whether it is right for you. If you want to discuss your circumstances and the strategies we can use to help you with your legal needs, we encourage you to book a call here.
What is a vendor take-back mortgage?
A typical mortgage is when a borrower borrows money from a lender and uses the property as collateral. The interest rate is usually determined by market rates and the loan is paid off over time in installment payments.
In contrast, with a vendor take-back mortgage, the seller of the property agrees to lend some or all of the purchase price to the buyer. Instead of paying in full at closing, the buyer provides a promissory note to the seller that can be converted into a mortgage.
The seller is the lender, and they set the interest rate, loan term and repayment schedule. The buyer needs to make sure that they can make timely payments on the promissory note in order to keep their home.
What are the benefits of a vendor take-back mortgage?
A vendor take-back mortgage can be beneficial for both buyers and sellers. For the buyer, they can purchase a home even if they don’t have enough money saved up for a down payment or don’t qualify for traditional financing.
Recently, many have turned to vendor take-back mortgages when the market cooled, and their home’s value dropped. Traditional lenders would no longer provide the full funding needed to purchase the property. That’s when a vendor take-back mortgage provided them with an alternative.
For the seller, this type of mortgage allows them to get cash now instead of waiting for their home to appreciate in value. Additionally, the seller can set the interest rate so that they are receiving a higher return on investment than traditional investments.
If you are the seller and do not need the full purchase price immediately, there are advantages to you. Vendor take-back mortgages can be a flexible way to get the money you need now and receive interest income in the future.
If you are an investor or are selling commercial properties, there are tax benefits to offering a vendor take-back mortgage. Speak with your accountant about how you can best structure your transactions to ensure you are getting the most out of the deal.
What risks are associated with a vendor take-back mortgage?
Although there are many benefits to a vendor take-back mortgage, it is important to be aware of the associated risks.
The biggest risk is that the buyer may default on their payments, leaving the seller without any repayment. In this situation, the seller may have to foreclose on the property.
Understanding your priority
Let’s imagine that you are the seller of a property for $1 million dollars. The buyer has obtained a mortgage from a lender, such as a bank for $750,000, and you provide a vendor take-back mortgage to cover the remaining amount of $250,000.
The buyer is unable to make the payments and the property is foreclosed. However, the market has cooled and the house is sold for $800,000. The order of the registration determines how the mortgages are paid. Since the first lender would have been registered first, they would be paid back in full. You would receive the remaining funds, which is significantly less than what is owed.
Pros and Cons for Buyers and Sellers
Let’s summarize the pros and cons for both buyers and sellers when it comes to a vendor take-back mortgage.
Pros and Cons for Buyers
|Easier to qualify for a mortgage and can cover the gaps where you cannot obtain traditional lending||You need to make sure to read the fine print carefully and make sure that your seller provides receipts for mortgage payments.|
|You can negotiate the terms and the interest rates||Typically has higher interest rates|
Pros and Cons for Sellers
|May be able to more quickly sell your home||If the buyer fails to make mortgage payments, the bank holds the primary mortgage and you could lose your investment or have to pursue it through litigation.|
|Can earn income from the interest being charged||Do not have access to full sale proceeds right away|
|May be able to defer capital gains taxes|
Strategic Buying and Selling Real Estate in 2023
The world we live in has changed and become increasingly complex. This is true when buying or selling your home. At Beeksma Law, we provide strategic advice and make sure that our clients understand all of their options, along with the risks and benefits.
If you want to see the difference it makes having a strategic advocate on your side, reach out today. We love helping our clients buy and sell their homes.