With the real estate market being scorch-worthy hot and mortgage interest rates being at an all-time low in Canada, there’s no better time to invest in your first home or to take advantage of rock-bottom rates while purchasing that cottage on Georgian Bay, you’ve always wanted. However, with tighter parameters around mortgages and lenders demanding higher down payments than in previous years – Without a healthy savings account to reply on, what options do you have to purchase that new house, you really want to call home?
One option that you might not be aware of is called a vendor take-back mortgage. A vendor take-back mortgage is a unique mortgage that allows you to secure the extra funds you might not already have set aside for your down payment without depending on the bank to give you a secondary loan to do so.
How does it work?
With a vendor take-back mortgage the seller of the home actually lends the new buyer of the property the funds to facilitate the purchase. Yes, you read that right! The seller of the home doesn’t give you the extra funding you need free of charge of course – in return, they would still possess equity in the home through a second lien on the property. This means that in exchange for the amount of money that the seller has lent you, they would still own a percentage of the home equal to their monetary investment until you have paid off the amount they originally lent to you in full plus interest.
How is it different?
Typically with a conventional mortgage you would pay a down payment of cash up front before the home closes and then the bank would transfer the remaining amount (that they have given you a mortgage for) to the seller to purchase the home in full. Until you pay the bank back in full for the amount you’ve borrowed from them, the bank owns a percentage of your home, equal to their monetary investment. With a vendor take-back mortgage you would still pay your down payment upfront in cash, but instead of paying the full down payment yourself, you might pay $20,000 down and the seller might also pay $20,000 towards your down payment upfront prior to the closing date – then the bank would transfer the funds they have approved you for with your mortgage to purchase the property in full. As you have actually been given two loans (one from the bank and one from the seller of the home), you would then have two loans to pay back in installments each month as agreed upon in your amortization schedule until you have paid both the bank and the seller in full for the amount borrowed along with the associated interest.
Why Would The Seller Want To Do That?
The most obvious reason is that it makes selling the home a faster process than waiting for a traditional offer, but specifically, it helps the seller of the home:
Generate extra income.
As they have loaned you money that will take you time to pay back to them in full, they collect interest from you on the overall amount, increasing their monthly cash flow for that time period.
The seller will pay less in taxes from capital gains on the sale.
As the seller of the home is not collecting the full amount of the sale in one tax year, they wouldn’t pay tax on the full amount of the sale up front either. Of course, they would gradually pay tax on the excess amount they have lent you as you pay them back, but overall it spreads out the gains over a longer period of time and possibly even multiple tax years.
As the real estate market continues it’s hot streak throughout the summer, banks and lenders continue to tighten the reins on their lending requirements, which can make a vendor take-back mortgage a great option to keep in mind when buying your first home or when looking to upgrade your family home to suit your growing needs. 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 entrepreneur – Give me a call and 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.