Jan

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Toronto Real Estate Lawyer (Part 24): Vendor Take Back Mortgages

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to your offer or agreement of purchase and sale (or wanting to back out of one) you should seek professional assistance (e.g. make a post on Dynamic Legal Forms). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you with your offer or agreement of purchase and sale.

What is a Vendor Take-Back mortgage (also called a VTB mortgage)? Well, in simple terms, a vendor take-back mortgage is a situation where the property owner who is selling their property is willing to provide some (or all) of the mortgage financing on the sale of that property. This typically happens in commercial deals where it may be difficult for a purchaser to be able to get financing (e.g. in the millions of dollars). So a mortgage is taken out with the vendor and payments are made directly by the purchaser to the vendor pursuant to a Vendor Take Back Mortgage Agreement. The title of the real estate property is transferred to the buyer. Most of these arrangement are neither renewable or transferable to the next home owner.

So a VTB mortgage is a way for the purchaser to be able to purchase the property by having the vendor finance part or all of the deal. Vendor take-back mortgages are typically used where the vendor knows and trust the purchaser and where the purchaser cannot otherwise secure the full amount of financing. The great thing for the vendor is that they can sell their property. Sometimes, they can charge higher than normal interest rates on the mortgage than a traditional bank or financial institution would (this reflects the higher risk level that the vendor is willing to accept). The great thing for the purchaser is that it will be able to get the financing it needs and the vendor will likely not be as stringent in asking for documentation in order to provide the mortgage: while the vendor is assessing the purchaser’s credit, it may be more flexible and lenient than a traditional bank.

Notwithstanding its advantages, a VTB mortgage should not be entered into lightly. It is a complicated matter and you should always consult with a real estate lawyer (e.g. by making a post on Dynamic Legal Forms). A real estate lawyer will review all the documentation to ensure that all necessary due diligence for the agreement of purchase and sale and mortgage is in place. For example, a real estate lawyer could determine whether a VTB mortgage, as a second mortgage on the property, is prohibited by the first mortgage being used by the purchaser to finance the deal.

Finally worth mentioning is that real estate brokerages are exempt from having to have a mortgage brokerage licence when arranging a vendor take-back mortgage, or attempting to do so, in the course of a trade in real estate. This is important because, under the Mortgage Brokerages, Lenders and Administrators Act 2006, a party wishing to deal or negotiate in mortgages must have a mortgage broker’s license. This would have required a real estate brokerage, which typically deals or negotiates VTB mortgages for its clients, to have successfully completed a Mortgage Broker Education Program from an approved provider, pay a bi-annual fee of nearly $500 and maintain errors and omissions insurance. This was just too onerous. So after some hard lobbying from the Ontario Real Estate Association, the Ontario government put an exemption for real estate brokerages in the Exemptions from the Requirements to be Licensed Regulations made under that Act. Basically, if the real estate brokerage does not otherwise hold itself out as dealing in mortgages (and does not engage in other activity that requires a license under the Act), then it can deal in VTB mortgages in the course of a trade in real estate.

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{ 1 comment }

Rocco Vandusen March 14, 2010 at 1:15 pm

WOW!!!!! that was just what i needed to know, helpfull and to the point, please keep up the brilliant work and i will be back for more soon!

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