In today’s volatile real estate market, it may seem impossible for you to afford a house. But let me enlighten you… there are MANY options available when it comes to types of mortgages, loans, and government initiatives to make it easier to become a homeowner. A vendor take-back mortgage may be the best option for you when there are no other options available. It’s something that sellers don’t think about very often but could end up as a savvy investment for them. As a reputable mortgage broker and financial advisor, I can discuss all the pros and cons of the vendor take-back mortgage, for a buyer and seller, and help you understand how it all works.
First, what is a vendor take-back mortgage?
A vendor take-back mortgage (VTB) is a type of mortgage where the seller offers to lend funds to the buyer to help them purchase the property. It makes it easier for people who can’t get pre-approved for a mortgage from another lender. It’s common for someone who doesn’t have a credit history, has previously gone bankrupt, young first-time homebuyers, or people new to the country.
This type of mortgage is negotiated between the buyer and the seller. It’s normally offered at a lower rate than traditional vendors. Whether it’s paid back without any penalties and what the interest rate will be are worked out between the two parties.
Pros of a vendor take-back mortgage for the buyer
- Easier to qualify;
- Sometimes offers lower mortgage rates than traditional lenders;
- Can negotiate the mortgage terms;
- If you’re buying multiple properties to rent, this may be a great option for you because the 20% down payment can be lower.
Pros of the vendor take-back mortgage for the seller
- Can use it as an investment by charging higher interest rates;
- Can promote the sale of the property and sell faster;
- Will have lower capital gains taxes because the seller isn’t receiving 100% of the sale upfront.
Cons of a vendor take-back mortgage for the buyer
- Make sure the seller is trustworthy and gives receipts for your mortgage payments. Read the fine print carefully in your agreement so you don’t run into issues.
- This mortgage type usually has higher interest rates so make sure you can afford your mortgage payments every month before signing on the dotted line. Check out my free mortgage calculator to see what you can afford to get you started.
Cons of the vendor take-back mortgage for the seller
- If the buyer fails to make mortgage payments, then the bank will hold the primary mortgage and the seller may lose their investment. This could lead to a long legal battle if issues arise.
- Make sure the buyer is trustworthy and makes payments on schedule. This is like a second mortgage, you need to ensure you will get the funds from the buyer.
- Can be costly to work with a reputable lawyer to draw up an agreement for you and the buyer to protect you against loan defaults. Do your research to make sure this is a good option for you.
As real estate market values continue to climb, banks and lenders continue to tighten the reins on their lending requirements which can make a vendor take-back mortgage a great option. If you’re buying your first home or looking to upgrade your family home to suit your growing needs, it may be the right choice for you. If you’ve been turned down by the banks or want to ensure you’re not locking up more cash flow than necessary as a real estate investor, give me a call, or send me an email. We can take a deeper look at ALL of your options to see if a vendor take-back mortgage, or other potential lending options, would be the best fit for your latest real estate adventure.