MARKET INSIGHT FOR THE WEEK ENDING DECEMBER 15th
Why Toronto is seeing more ‘vendor take-back’ mortgages as pre-construction appraisals fall short.
Buyers who have purchased a pre-construction freehold property and have received an appraisal that’s fallen considerably short of their original purchase price, are sometimes offered a vendor take-back mortgage, which can act as a lifeline, lawyer says.
Vendor take-back mortgages (VTB) offer an alluring option for buyers who have bought a pre-construction home but have seen their appraisals fall short by hundreds of thousands of dollars, as Toronto tries to find its footing in a high-interest rate environment.
Buyers who have received an appraisal that’s considerably short of their original purchase price are sometimes offered the mortgages as a lifeline, said Mark Morris, a lawyer at real estate law firm Legalclosing.ca.
A vendor take-back mortgage is when the seller of the home lends money to the buyer — essentially acting as a bank by allowing the homebuyer to borrow money in order to purchase the seller’s home. The loan is typically offered for one or two years and can cover part or all of the purchase, Morris explained.
“We’re seeing this more and more,” he said, adding it’s specifically with smaller developers and builders, who are seeing more buyers walk away from their purchases — especially as a growing number of homebuyers are leaving behind sizable deposits, some worth as much as $320,000. The top developers aren’t offering take-back mortgages because their pre-construction condos and freeholds aren’t being hit by the same appraisal shortfalls compared to smaller developers who built on less profitable land and are over-leveraged.
“It’s happening with smaller building companies making single-family homes because they took big leaps in regions that don’t have great land valuations,” he added.
Builders who feel they won’t be able to find another buyer and need to continue to finance the project, will sometimes offer a vendor take-back mortgage to the buyer. In some cases, it might make more sense for the buyer to try and sell the property and in others, the take-back mortgage can provide the necessary financing to close the purchase.
Some builders are realizing they have a growing number of pre-construction buyers who won’t be able to close and new buyers won’t scoop up those properties.
Some vendor take-back mortgages are also being offered in the residential resale market, where the deals offer one more way to close the deal. However, several mortgage brokers in Toronto told the Star they haven’t seen any increase in this product in their respective practices.
If the buyer fails to make the payments to the seller, they would need to enter legal proceedings — just as a bank would if the buyer defaulted on the mortgage.
It’s unlikely first-time home buyers would have a vendor take-back mortgage as they would need a standard mortgage from a bank, which would likely prohibit secondary financing on the property. The seller can also only offer the take-back mortgage if they have enough equity in the property to act as collateral in case the buyer is unable to pay back the mortgage loan.
Here are the top 5 trending stories of the week:
- Rent Prices Fall Again In Toronto, Remain Flat In Vancouver | “Canadians may have become used to unprecedented irregularity in the real estate market, but things may be headed toward normal conditions next year, according to Royal LePage. Its Market Survey Forecast reports that in Q4 of 2024, the aggregate home price will increase by 5.5 per cent year over year to $843,684, with the median price of a single-family detached home and condominium increasing by 6 per cent and 5 per cent to $879,164 and $616,140, respectively.”
- Federal government reboots Canada’s housing policy from Second World War | “What is old is new again when it comes to Canada’s national housing policy. The federal government announced today it is reviving a previous housing policy now about 80 years old, which was created in response to the immense demand for housing after the Second World War.”
- We are approaching a buyers’ markets with no buyers: CIBC’s Benjamin Tal | “Looking ahead to Canada’s housing markets in 2024 and beyond, Benjamin Tal, deputy chief economist at CIBC says, housing market activity will continue to deteriorate and won’t rebound until early to mid-2025.
- Canadian Mortgage Rates Peaked, Won’t Go Back To 2019 Levels: BMO | “North American interest rate hikes are now largely out of the picture, and rate cuts are the new story. That was the take from BMO after the Bank of Canada (BoC) announced a hold on the 6th, with the US Federal Reserve expected to do the same on the 13th. Now the question on everyone’s mind is, how much will rates be cut?”
- How An NBA Star And A Crypto King Shook Up Real Estate Law | “Shai Gilgeous-Alexander, a Toronto-born point guard for the Oklahoma City Thunder, has won a lawsuit to rescind his purchase of a Burlington mansion that was once home to Aiden Pleterski, Ontario’s self-described “Crypto King.”
The Bosley Advantage
Read about the heritage and innovation that form the foundation for Bosley’s industry-leading approach to real estate.
