Blog by Betsy Carstairs

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Vendor Take back Mortgages

When we bought our 1st home in the late '70's the only way we were able to get into the market was with the seller giving us a mortgage. We were fresh out of university & savings were @ a minimum so this worked very well for us as well as for the seller so I thought this article would be of interest. Excerpt from CTV's News website

Should you be someone else's mortgage lender?

Preet Banerjee

 This week we'll take a look at holding someone else's mortgage as an investment in general (which can be inside or outside your RRSP).

While holding your own mortgage inside your RRSP is a non-arm's length transaction subject to CMHC insurance premiums, holding someone else's mortgage can be an arm's length transaction and potentially not subject to these premiums.

The best analogy for remembering the difference between an arm's length transaction and a non-arm's length transaction is to think of only being able to hug people who are close to you. You would probably only do this with family. This would be “less than arm's length” or non-arm's length. Dealing with someone at arm's length means they are too far to hug. You wouldn't hug a stranger, would you?

If you are lending funds to a borrower to purchase a property that you are selling, this is known as a vendor take back mortgage. You could lend out the full mortgage amount, or it could be a partial amount.

For example, let's assume you are selling your house for $500,000. You find a buyer and you agree to the sale contingent on the buyer arranging financing. The buyer is having some trouble coming up with the full purchase amount required – perhaps they are $20,000 short, or maybe they are real estate investors and want to keep some capital at their disposal. There are a few different reasons buyers may be interested in a vendor take back mortgage.

You could sell your house for $480,000 plus a $20,000 vendor take back mortgage. The purchaser could agree to pay back the $20,000 principal plus interest over time as per the terms you negotiate. The vendor take back mortgage could carry an interest rate higher or lower than prevailing market rates: This would depend on the tradeoff between their credit worthiness and the amount of time within which you need to sell the house, among other factors. Payments from the borrower are partly principal repayment, which is not subject to tax, and partly interest, which is taxed at your marginal rate.

Usually all that is required is to complete an agreement between the vendor and buyer and then to find a trustee to administer the terms of the mortgage for you. Of course, you'll want to assess the credit quality of the borrower and it's recommended to engage a real estate lawyer who is familiar with handling these types of transactions.

While many private mortgage investors may be accustomed to high rates of interest being earned, the tradeoff comes in the form of liquidity and risk. If you want out of the mortgage investment, it's not like you can go online and place a sell order, which gets filled almost instantaneously. But more importantly, if the borrower defaults, you could be faced with the troubling prospect of weighing the risk of proceeding with a power of sale.