A detached three-bedroom home in Danforth village, two-bedroom loft in Little Portugal, a family home with three bedrooms in Lawrence Park north — a year ago, all of these properties might have seemed out of reach for the average Toronto buyer short on cash. But with sustained high interest rates and a fall season of growing inventory and low sales, sellers of all three of these homes are open to a new financing option — the vendor take back (VTB) mortgage.
A financing agreement where the seller of a property lends money to the buyer to help them purchase the property, the VTB mortgage has been largely forgotten over the last decade of low interest rates. But as Canada’s interest rate has been raised again and again over the past year, leading to an overflow of new listings in Toronto and fewer sales, sellers trying their best to sell and buyers desperate to afford a mortgage are considering the VTB mortgage way.
There are currently around 24 listings on the Toronto Regional Real Estate Board that offer VTB mortgages as an option for buyers, and likely more to come.
“It’s essentially an incentive to sweeten the deal for the buyer,” Foster Jackson, a realtor with Homewise Real Estate, said.
He currently has two listings on the market where sellers asked to offer a VTB mortgage as an option. Jackson sees these mortgages as a sort of “hidden gem” to combat the state of the current market. “Once interest rates come down, they may start to phase out.”
But Krisztina Daniel, a realtor with Right at Home Realty and mortgage agent with Chartered Finance, sees VTB mortgages as more of a “marketing move” where sellers might not be thinking through all of the risks.
“Sellers should be aware of the quality of the pool of buyers they’re attracting by advertising a VTB option,” Daniel said. “If they’re interested in this kind of solution, that means they’re having an issue getting an institutional mortgage.”
Daniel said that if a seller does agree to this loan, they should be cognizant of property value. “There’s been a downward trend in property value, so they have to be very careful what loan-to-value ratio they are providing in this mortgage.
She also noted that if a buyer can’t qualify for a loan now, that will mean a seller’s equity will be locked up for longer. “Your buyer might not have an exit strategy next year.”
Jackson said that buyers should beware, too, when it comes to agreeing to a VTB mortgage.
“There could be a clause within a VTB contract that a buyer can’t do any renovations, or other restrictions, until the loan is paid off,” he said. For a buyer who is looking for the relief of finally owning a home, this kind of loan could delay that feeling. “But that may be worth it for your dream house that you wouldn’t otherwise be able to afford.”
The terms are definitely tempting — Jackson said that for his two-bedroom condo listing in South Riverdale right now, the seller is offering a VTB mortgage of up to $85,000 for zero per cent for 18 months.
“It’s all about pushing that deal across the finish line,” he said.