Canadian cottage prices are still at record-highs despite the economy inching towards a recession. That’s why cash-strapped buyers are increasingly turning to an alternative financing options to purchase a cottage, including vendor take-back (VTB) mortgages.
With a VTB mortgage, the property seller is the lender. “No bank or mortgage broker is necessary with a VTB,” says Andrew Thake, a mortgage broker in Ottawa. “It’s essentially a private loan agreement between a seller and buyer.”
A VTB is often utilized as a second mortgage that supplements an initial mortgage from a traditional lender such as a bank. “The VTB can bridge the gap when a bank is unwilling to finance the entire purchase price of a property, and the buyer doesn’t have enough of a down payment to cover the rest,” says Thake.
Because conventional mortgage interest rates are on the rise, Thake adds it’s actually sellers who typically instigate a VTB to help close a sale when they’re having trouble finding a buyer. For example, buyers might struggle to qualify for mortgages on unique cottage properties that don’t meet major lender requirements. “You see this especially with remote properties without much direct access, or cottages that lack potable water,” says Thake. In those cases, or in other scenarios where their cottage simply isn’t attracting buyers, sellers can entice offers in this tough economy by proposing a VTB with generous terms.
If the terms are right for both parties, a VTB is a win-win: the buyer is able to afford their cottage, while the seller successfully closes a property that would otherwise have no takers— with the bonus of earning added profit from the VTB interest.
For sellers who prefer a clean break once the sale closes, Thake cautions that a VTB can potentially lead to an unwanted ongoing relationship with the buyer. “They will be more inclined to ask questions like, ‘how do you winterize this?’ or ‘where did you put the lock to the shed?’ if their financial commitment to you extends beyond closing,” he says.
Thake also advises transparency with all other parties when a VTB is in place: a bank may adjust its financing if it discovers an undisclosed agreement between the seller and buyer. “If everyone knows the numbers, there aren’t any unwelcome surprises.”