Issue #3 – VTB Mortgages
A Deep-dive into Vendor Take-Back Mortgages
A vendor take-back mortgage, also known as a VTB mortgage or seller take-back mortgage, is when the seller of a property lends money to the buyer of the property. The seller acts as a mortgage lender by letting the buyer borrow money in order to purchase the seller’s property, and the seller can partially or fully finance the purchase. In today’s economic climate, VTB’s have become a necessity in many property sales.
A VTB is critical in today’s credit market
A vendor-take-back mortgage (VTB) can be important in today’s challenging credit environment because it provides an alternative source of financing for buyers who may have difficulty securing a traditional mortgage. In a challenging credit environment, lenders may have stricter lending criteria and may not be as willing to approve loans to some buyers. In such cases, a VTB can help bridge the gap by allowing the seller to provide financing to the buyer.
General benefits include:
Access to financing: A VTB can provide an alternative option for buyers who are unable to secure financing from traditional sources.
More flexible terms: The terms of a VTB can be more flexible and customized to meet the specific needs of the buyer and seller.
Speed: VTBs can be arranged more quickly compared to traditional mortgages, which can be beneficial for buyers who need to close the transaction quickly.
Lower upfront costs: By financing the purchase through a VTB, buyers may not need to provide as much of a down payment, which can reduce their upfront costs.
Benefits to Buyers when considering a VTB mortgage
Reduced upfront costs: By financing the purchase through a VTB, buyers may not need to provide as much of a down payment, which can reduce their upfront costs
Potential for lower interest rates: The seller may be willing to offer more favorable interest rates compared to a traditional mortgage, which can save the buyer money over the long term
Speed: VTBs can be arranged quickly, which can be beneficial for buyers who need to close the transaction quickly
Alternative source of financing: For buyers who are unable to secure financing from traditional sources, a VTB may provide an alternative option
Seller Tax Advantages of a VTB
Interest Deduction: The interest paid on a VTB mortgage is tax-deductible for the buyer, just like with a traditional mortgage.
Capital Gains Tax: For the seller, a VTB can reduce the amount of capital gains tax owed upon the sale of the property, as the sale price is spread over the term of the mortgage.
Depreciation Deduction: The buyer may be able to claim depreciation deductions on the property, which can reduce their taxable income.
Income from Interest: The seller can receive income from the interest payments made by the buyer, which is taxable as investment income.
It is important to note that tax laws and regulations can change over time and may vary by geography, so it is advisable to consult with a tax professional for guidance on the tax implications of a VTB in your specific situation.
Overall, a vendor-take-back mortgage can be a useful option for both buyers and sellers, as long as all parties carefully consider the terms and obligations involved.
If buying or selling is something you are considering, the VTB may be a helpful tool available to you. We are seeing a rapidly increasing number of these mortgages in the marketplace. Please feel free to get in touch with a member of Team Murray & Faldowski to discuss available options.
By: Sean Kelly, Sales Representative, Colliers Canada