What is a Vendor Take Back Mortgage in Canada?

In the typical sale of a home, the buyer obtains a mortgage from a bank or other lender to purchase the property off of the seller. But there are other options out there as well, one of which is known as a “Vendor Take Back Mortgage”.

In this article, we’ll learn all about Take Back Mortgages including what they are, how they work, and how they benefit buyers and sellers. So let’s not waste another minute!

What are Vendor Take Back Mortgages?

A Vendor Take Back Mortgage isn’t your typical mortgage. Rather, it’s the seller of the home or property that lends the buyer money in this type of mortgage. In other words, in a Take Back Mortgage, the seller of the home extends a loan to the buyer so that they can close the deal. 

Though this isn’t the typical type of mortgage, it works very similar to a regular mortgage in that buyers are still required to make regular payments. The only difference is that instead of payments going to the bank or mortgage lender, payments are going to the property seller.

Interest rates are determined by the seller and must be agreed upon legally by the buyer. In most cases, interest rates for Vendor Take Back Mortgages will be much higher than traditional mortgages.

Until the mortgage is paid in full, the home seller continues to hold equity in the home, proportional to what is still owed on the mortgage. If the buyer defaults on the loan, the owner has the right to put the property in foreclosure (just as a typical mortgage lender would).

What are the Advantages of Vendor Take Back Mortgages?

Though Vendor Take Back Mortgages aren’t your traditional type of mortgage, they can be beneficial in specific scenarios.

Vendor Take Back Mortgages provide a secondary option to bank loans or traditional mortgage lenders for the buyer. These loans can be difficult to secure without good credit or when down payments are a challenge. Vendor Take Back Mortgages provide an alternative option that can allow a buyer to purchase a home when they have difficulty obtaining traditional mortgages. 

For the seller, Vendor Take Back Mortgages hold several advantages as well. Firstly, it can help them sell their property quicker. Secondly, it can allow the seller to generate additional income from the interest that is incurred. And finally, when providing a Take Back Mortgage, sellers can reduce the amount of taxes they owe on their Capital Gains

Furthermore, Vendor Take Back Mortgages can be very beneficial in a buyers market. When competition among sellers is high, Take Back Mortgages can incentivize buyers to select one property over another. 

Concerns regarding Vendor Take Back Mortgages

For sellers, the biggest concern about Take Back Mortgages would be payments from the buyer. Just as some buyers default on regular mortgage payments, some buyers may default on their Take Back Mortgages. If this happens, the payments lay on your shoulders. 

When offering Vendor Take Back Mortgages, sellers must also consider the lawyer costs involved. You need to have a professional and experienced lawyer to draft up agreements that can protect you in the event of default. This can become very costly.

Furthermore, if you ever do have to place the home in foreclosure due to default, it’s important to know that this can be a lengthy and costly process as well. 

As a buyer, you need to remind yourself that Vendor Take Backs are often like second mortgages. In many cases, sellers will provide the buyer with a downpayment or a certain portion of the mortgage, and the bank will cover the rest. In such a case, the buyer now has to pay back both the bank and the seller. 

It’s also important for the buyer to remember that Take Back Mortgages often have much higher interest rates than those offered by banks or traditional mortgage lenders. You must be able to pay these fees each month to prevent your new home from going into foreclosure. 

Conclusion

In conclusion, Vendor Take Back Mortgages can be a great option for buyers who are having difficulty obtaining a loan, and they can provide sellers with additional income. But as beneficial as Take Back Mortgages can be, they also come with their own risks. Be sure that you understand all of the risks involved before entering into any legal agreement for a Vendor Take Back Mortgage. 

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