Vendor-Take-Back Mortgages - the truth about this often misunderstood term
On the surface, vendor-take-back mortgages, known simply as VTB’s, offer investors unique opportunities to inquire real estate in circumstances where capital is limited or traditional financing isn’t available. But it’s not as easy as you think due to changes in mortgage legislation known as B-20.
Let’s go further.
By definition, a vendor-take-back mortgage involves, well, the vendor or the seller of a particular property. If the seller is not involved, then what you have is a simple private mortgage. With a VTB, the vendor offers part of the purchase price as a loan, or a mortgage, to the very buyer who is purchasing the same property. Sounds confusing right? Let’s clear up the mud with an example.
I sell you a $100,000 property. You obtain $80,000 from the bank and are now $20,000 short. You don’t have any cash so I lend you $20,000, as a VTB, and now you have the full $100,000 needed. At closing, you become the owner and I become the lender. You have a 1st mortgage of $80,000 and a second mortgage of $20,000.
Why on Earth would someone want to do this, either buyer or seller? Well, for the buyer, it allows him or her to acquire properties with little or no money down. And for the seller, it allows them to a) sell the home and b) earn interest on a portion of their sale proceeds. Currently, I am buying a 35-unit apartment building in Ottawa where I arranged a $1,200,000 VTB. Without getting into the details, it made the transaction lucrative for both parties.
Now, back to my example above. Despite this working on a strategic level, the deal described cannot work in reality. Mortgage regulations prevent lenders from allowing secondary financing past 80% loan to value or at all with insured mortgages. Meaning, despite the seller and buyer being on board, they simply could not do this deal as the first lender would prohibit it.
Notwithstanding this however, VTB’s can still be used strategically and as follows:
Jointly with other private loans as these do not follow B-20 rules
Secured against additional properties that the buyer owns - the rule only states no secondary financing on the subject property
Keep it under 80% loan to value. In the above example, we could change to 70% from the bank, 10% VTB and 20% from buyer’s personal funds
Lastly, these deals are often difficult to put together because sellers either do not understand the process nor do they have sufficient equity to make the deal work logistically. Imagine in the previous example I had a $90,000 existing mortgage; well clearly, there would not be enough real cash to pay this off and thus the deal would be on a stand still.
