Vendor take-back mortgages were fairly popular in Canada 25 to 30 years ago when interest rates were stratospheric compared to where they are today.
While seemingly a relic, could vendor tack-back mortgages make a comeback in the residential real estate market now that B-20 has made mortgage qualification a nightmare for many would-be buyers?
“B-20 could definitely make vendor tack-back mortgages more attractive,” said Tim Syrianos, broker-owner of REMAX Ultimate Realty in Toronto. “If people have the qualifications necessary other than 200 extra basis points, that is.
“The seller could benefit by having the vendor take-back mortgage because they earn interest on money lenders don’t offer and it’s a more secure environment because it’s against real estate.”
While Syrianos acknowledged vendor tack-back mortgages could function as a solution to B-20, he does not expect they will resurface in the residential real estate market anytime soon. The growth of private lenders and mortgage investment corporations are a big reason. The other is reason is sellers usually need the money they earn from selling their homes to purchase new ones.
“They’re not as commonplace in the market today because people need money to purchase their own homes, but if they exit the market completely it’s possible,” said Syrianos. “If you sell your property and you have this equity on hand and you’re unsure of what to do with it, you may look to invest it with a mortgage company or lender.”
In the ‘80s and ‘90s when interest rates were well over 10%, vendor take-back mortgages were very common, he added.
“In the early 1980s when interest rates were as high as 19% and 20% you’d see them more. Even when interest rates were as high as 15% in the early ‘90s you’d see them.”
But according to Dustan Woodhouse, president of Mortgage Architects, while vendor take-back mortgages represent less than 1% of the traditional residential real estate market, they make quite a bit of sense in the commercial sector.
“With exceptions being unique or difficult-to-finance properties such as boat access-only properties, rural mobiles, rural acreage or even boat access mobile on acreage,” he said. “Where there’s likely more vendor take-back activity is on the commercial side where the rate of return is a bit more attractive for the investor and where an operating business may also be part of the transaction, such as the entire mobile home park, or a small manufacturing facility.”
Whether or not vendor take-back mortgages ever return to the residential market remains to be seen, but don’t be surprised if they do indeed return one day.
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