Cottage Q&A: Mortgage options when buying a cottage

Published: March 4, 2020

mortgage options By Billion Photos/Shutterstock

What is a vendor take-back mortgage? Are these a good idea for buyers and sellers?—Lizzie St. Pierre, Bancroft, Ont.

In real estate, a vendor take-back mortgage—a.k.a. vendor financing—is just that: when the seller provides some (or occasionally all) of the financing for the person buying the property. This can be
a great idea for a buyer who can’t get enough financing from the bank or a mortgage lender.

Cottages are definitely not the easiest properties to finance,” says Ken Beaton, the president of Arca Real Estate Investments. Banks will often only offer 60 or 70 per cent of the money for a recreational property; a buyer could then get another 30 per cent from the vendor, says Beaton. This is the typical scenario, where the vendor take-back mortgage is in second position and “fills in the void.”

But there are even more benefits for the seller, says Claire Drage, a mortgage broker with Mortgage Alliance. A biggie? This strategy may let the seller defer the capital gains tax. If a seller has a property with a $300,000 sale price but gets $250,000 on closing, they initially pay the capital gains tax only on that $250,000. They could spread the effect of the rest of the tax over several years.

A vendor take-back mortgage also acts like a monthly income for the seller. “Unless you need every penny of a lump sum, having that money coming in can be a major benefit,” says Drage. It’s even possible to arrange a situation where, while the buyer is paying off the vendor mortgage, the seller retains use of the cottage for, say, two weeks a year.

Still, says Beaton, it doesn’t hurt for sellers to be cautious. Get your buyer’s personal credit score or credit history and a net worth statement, he says. “You need to ask for the same things that a bank would.”

New to cottage real estate? Here are 15 terms for newbie buyers.

Got a question for Cottage Life’s Cottage Q&A? Send it to answers@cottagelife.com.

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