If you’re selling a house in Guelph, you may have encountered buyers proposing a vendor take back mortgage, or vtb mortgage. In fact, over the past month we’ve encountered this twice where we haven’t had a single instance of this type of mortgage in the previous 5 years.
What is a vendor take back mortgage?
A vendor take back mortgage is when the seller (vendor) acts as the bank and holds the mortgage for the buyer for a specific time at a specific interest rate. This is often used by investors who can’t get traditional financing from a bank. VTB mortgages are typically at a higher interest rate than a traditional mortgage as it’s considered private lending.
Buyers: Pros and cons of a vendor take back mortgage
Pro’s:
You may not need a traditional downpayment
As the buyer, especially as an investor you’ll need to come up with 20% downpayment if dealing with a traditional lender. Considering the average price of house in Guelph is $750,000, this would be $150,000 is 20%. Rather than struggling to come up with this amount, you could consider proposing a vendor take back mortgage that would potentially allow you to put as little as 5-10%, depending on what is negotiated with the seller.
The terms are simpler
Typically VTB terms are pretty straight forward and can be worked out with the buyer and sellers lawyer. Often times the buyer can bypass what a traditional financial institution would require: a larger downpayment, a doesn’t need to get a credit check/credit score and you’re immune to what the housing market does if you have a fixed rate.
Cons:
You’ll likely have higher interest rates
If a buyer wants to work with a seller on a seller take-back mortgage, they’ll likely pay higher interest rates. Essentially the seller becomes a private lender and these lenders usually have high interest rates and therefore higher mortgage payments.
You’ll likely be making interest only payments for a duration and pay close to asking price for the property
As an incentive to the seller to accept a VTB, the buyers purchase price will likely need to be higher. The buyer will likely also be making monthly payments of interest only between the time they take ownership and the time the buyer pays the remaining balance.
For the seller: pros and cons of a VTB
Pro’s:
A higher price
the seller who agrees to take on a VTB should be holding pretty firm on their asking price. After all, they’re offering the buyer financing that wouldn’t normally be an option.
Regular payments
the seller, although they won’t get the full price up front will start to receive regular payments (usually interest only) from the buyer.
Cons:
You don’t get all your money up front
As part of providing vendor financing, you get some of the money upfront. Consider it a down payment. Then, you get the rest at the end of the term. The seller of the property needs to be in a financial position to not require all the money immediately.
The seller of the home does take on some financial risk
This type of loan isn’t for everyone. There is a reason a buyer is looking for a first mortgage from you directly. Ensure that the loan terms are reviewed by a lawyer. Also ensure you understand the contractual obligations on the property before committing to VTB financing.
Example of vendor take back:
Here’s an example of a standard vendor take back (VTB) from the local real estate market:
Seller is selling a house at 123 Main St for $500,000.
A buyer offers a VTB mortgage to the seller of 10% down ($50,000). Interest only payments at 5% for 24 months. And, the balance of the funds ($450,000) paid at the end of the term. Is this a good deal? Let’s look at the numbers:
The seller receives their full asking price (good) with $50,000 upfront and 5% interest payments on the balance. This means that the seller will receive a monthly cheque for $1875 of interest income. This will help with their cash flow ($450,000 x 5% annually divided by 12 months). Then, at the end of the 24 months the seller gets the remaining balance of $450,000
If the seller doesn’t need more than $50,000 up front, this could be a good deal. However, given the current real estate market, 5% interest is less than the going rate of a traditional lender. Therefore, the seller of a property providing private seller financing should be 2-3% higher than the market. Therefore, let’s say traditional bank rates are 6%. In this case, the seller should be looking for a much higher rate of 9% or so.
When a VTB makes sense
In a buyer’s market like we’re in, buyers have more control. And, the reason we’ve moved into a buyers market here in Ontario is that interest rates are higher. This means mortgage rates are higher (fixed-rate mortgage and variable). In a tough market, real estate investors/ buyers are looking for different ways to make the finances work.
If the seller isn’t in need of funds, a VTB is a great creative way to get financing. As long as it’s a suitable sale price for all.
About us
Beth and Ryan Waller are Guelph real estate agents. They can help you through the ins and outs of vendor take back mortgages. They can also explain other creative options that we’re seeing in todays market.
