One of the best ways for Cambridge Ontario real estate buyers to increase the loan-to-value ratio of their purchase beyond what their lending institution has set out is through a vendor take-back mortgage.
According to the Canada Mortgage and Housing Corporation (CMHC), a vendor take-back mortgage is "where the vendor rather than a financial institution finances the mortgage. The title of the property is transferred to the buyer who makes mortgage payments directly to the seller. These types of mortgages, sometimes referred to as take-back mortgages, can be helpful if you need a second mortgage to by a home."
For example, if Cambridge Ontario real estate buyers want to purchase a property worth $200,000 but have only been approved by their bank for a $160,000 mortgage (an 80% loan-to-value ratio financing), they're responsible for a $40,000 down payment. The buyer can further leverage the investment through a vendor take-back mortgage where the seller would agree to withhold $20,000 from the proceeds of sale in the form of a loan to the buyer at an agreed upon interest rate. Because of this loan, the Cambridge Ontario real estate buyers have to come up with $20,000 less upfront.
Top Six Reasons to use Vendor Take-Back Mortgages
Here are six important reasons to remember when considering a vendor take-back mortgage:
- Easier to Qualify: Cambridge Ontario real estate buyers can use a vendor take-back mortgage to purchase property that would be beyond their limitations going through traditional funding.
- Lower Down Payment Means Higher Return On Investment: Cambridge Ontario real estate buyers who are looking to buy multiple rental properties don't want to use their own capital for a 20% down payment. Vendor take-back mortgages allow them to buy multiple properties without tying up a large amount of money in each property and thus increasing their return on investment for each property.
- Easier to Sell: Vendor take-back mortgages actually speed up a sale because they provide a benefit for both the buyer and the seller. The seller makes a quicker sale because there's another source of financing for the buyer, and the buyer can get a vendor take-back mortgage at a rate below market value.
- Tax Deferral: Because the seller isn't receiving 100% of the sale cost up front in one fiscal year, they have lower capital gains taxes. This is an incentive for a seller to agree to a vendor take-back mortgage.
- Good Interest Rates: Cambridge Ontario real estate buyers will find that vendor take-back mortgages are cheaper than any other private money offered for an investment. The seller will also find that this is a solid investment. The interest that they'll get by participating in a vendor take-back mortgage is several points higher than what they'd receive by investing that money in a GIC or savings bond.
- Lower Fees: Cambridge Ontario real estate buyers who want a higher ratio (in excess of 80%) from a conventional lender will be hit with Canadian Mortgage and Housing Corporation fees and premiums or will see 2 to 4 points on their loan value. A vendor take-back mortgage can help you avoid this by being able to make a larger down payment than you otherwise could have managed.
For more information on vendor take-back mortgages, contact KWCPB Cambridge Ontario real estate buyers toll free at 1-877-77-KWCPB.
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Table of Contents
Real Cost of Real Estate Agents
By My Cambridge Home
Sell My Problem Property
Sell Your Home After Divorce
Benefits of a Quick Sale
I've Been Made Redundant
Avoid a Broken Chain
Sell Your Home Due to Illness
Sell Inherited Property Fast
Beware of Property Buyer Imposters
Private Property Sales
Become a First Time Buyer Again
Disadvantages of a Short Sale
Disadvantage of Sale By Owner
Top Six Things to Look for in a Contractor
Top Six Reasons for Vendor Take Back Mortgages
Six Mistakes Made By Real Estate Investors
Top Six Reasons to Use a Mortgage Broker