VTBs – a popular financial product in the 80s – have made a gradual return to the Canadian market in light of tighter lending guidelines, but only to some segments of the market.
“They (VTBs) are relatively non-existent in the residential market,” says Edward Ricciardi, mortgage agent with Dominion Lending Centres. “There is not much of a return for the buyer, so there is no incentive in this area. It is primarily in the commercial market we are seeing this activity again.”
That may be, but VTBs, even in residential sphere, are not uncommon. But finding a vendor willing to engage in this type of transaction is the problem many buyers, especially newer investors, face.
“It is not just younger people who are looking at this type of finance,” argues Ricciardi. “A lot of experienced investors are choosing this option to keep their own capital free.”
No matter the age, says Ricciardi, the risk remains.
“For the buyer, there is the issue of using their own collateral, such as a house, which they will obviously lose if there is a default,” he says. “It is happening, especially with inexperienced people in the commercial area (when) they lease out the property to fly-by-night store people and then they are left with nothing.”
Still, he estimates these rates of default in relation to VTBs are in the single digits.
Sourcing partial finance from a lending institution and the remainder through a VTB is the most common method used, adds Ricciardi. “To minimize risk, buyers try to reduce their exposure in VTBs. It could be anywhere from 50 to 30 per cent of overall cost.”
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