Q: I heard a few people at the last REAG meeting talking about a “Vendor Take-back” mortgage. What is this?

A: A Vendor Take-back mortgage is a mortgage that the vendor (or seller) will carry for you. Typically the reason that you would want to obtain a vendor take-back is to lower the amount of down payment you need to come up with. Today most lenders will only allow a vendor take-back to a maximum of 90% financing, so typically the buyer will obtain financing to 80% through their bank or broker, and ask for a 10% vendor take-back through the seller. Remember that typically the lenders want the VTB to be amortized and the payments have to be factored in to debt servicing for qualifying.

Here are the main benefits for the buyer:

–          Lower down payment

–          Can be used to avoid CMHC (ie 90% financing on an owner occupied home, without the CMHC fees)

–          In some cases the payments can be structured to include balloon payments, etc with the first lender’s permission

–          Possibly more favourable terms on the VTB

–          If the seller doesn’t have a good reason not to offer a VTB, it may mean that the seller is not confident about his security, which is the property you may be buying…if the seller doesn’t like the home maybe there is a reason you shouldn’t either!

And the benefits for the seller:

–          Can help you sell your home more quickly by lowering the amount of capital needed to purchase your property

–          If selling a rental it is possible to defer capital gains for up to 5 years (have the seller talk to an accountant, or better yet, YOUR accountant)

–          Seller can keep a revenue stream through the VTB

–          Sometimes the seller will negotiate a higher rate of return on the VTB than they can get elsewhere in the market

A lot of my seasoned veterans ask if a VTB is available on EVERY property they pursue. Imagine being able to nearly double the leverage you currently have with your capital (Reducing the down payment per property from 20% to 10%)!

Remember, this is as important a tool for buyers to use as it is for sellers. The new CMHC rule changes regarding rental properties has put a lot of people out of the market as the 20% down is now too high. If you can bring some of them back in offering a 10% VTB, you could have more action and therefore a higher price (or maybe you just need a SALE regardless of the price?).

For more questions contact Kyle Green at 778-373-5441 or kgreen@mortgagealliance.com