This generation of first time borrowers are spoiled rotten. Imagine their shock 5 years from now when their ultra low 3.59% fixed rate mortgage is renewed into a more realistic 6% mortgage? When I speak to older borrowers who have been around the block a few times I am constantly reminded by them of the 80s when mortgage interest rates where in the double digits and 24% wasn’t unheard of.
At that time my father was already a mortgage broker and told me that the majority of his business was arranging VTBs or vendor take back mortgages. Obviously with bank rates at 24%, the costs of owning a home were prohibitive and it was difficult to sell houses. Motivated sellers could make their home more attractive to purchasers by offering to lend money to the purchaser through a vendor take back mortgage at a much more competitive rate. The advantage is twofold:
1- The purchaser gets a great rate and by passes the stingy qualification of the bank.
2- For the vendor they are earning interest on the money that they have lent through a secure mortgage. The draw back for the vendor of course is that they loose liquidity from the sale of their home to spend elsewhere. Especially problematic if they are buying elsewhere.
A vendor take back mortgage is only possible provided that the vendor has sufficient equity in their own home. (i.e. if they are financed 100% they can’t offer a VTB because there is no equity)
Today VTBs are quite rare for residential purchases but an interesting article published by the Financial Post this week ‘Mortgages: You Can Take Them Or Leave Them’ suggests that in the future, the environment might dictate a return of the VTB.
If you are looking to arrange a VTB mortgage or need some guidance in offering one through a commercial sale or residential sale don’t hesitate to give Arnold or I a call. We love working on private mortgages and complex financing situations. 416.461.0204
September 29, 2010
