When selling a property in Toronto, it’s important to consider all financing options available, including Seller Take Back Mortgages (STBMs). I have experience in working with both buyers and sellers regarding this financing option and in this blog post, I’ll explore what they are and provide an in-depth analysis of their benefits and risks. I’ll also outline the legal requirements for STBMs in Toronto and discuss best practices for obtaining an STBM. A Seller Take Back Mortgage is also known previously as a Vendor Take Back Mortgage (VTB).

What is a Seller Take Back Mortgage?

Before considering an STBM, it’s important to understand what it is and how it works. An STBM is a financing option in which the seller of a property acts as the lender and provides financing to the buyer instead of a traditional mortgage lender. The STBM can cover part or all of the purchase price, and it is usually structured as a second mortgage, with the first mortgage being provided by a traditional lender.

Here are some examples of how STBMs can be structured:

1. Seller Take Back Mortgage as a First Mortgage: Let’s say that John is selling his property to Sarah for $500,000. Sarah has a good credit score but has recently changed jobs and doesn’t have the required employment history to qualify for a traditional mortgage. To help Sarah secure financing, John offers to provide an STBM as a first mortgage for $400,000 at an interest rate of 6% with a repayment period of 25 years. Sarah would need to come up with the remaining $100,000 as a down payment. John and Sarah agree to a monthly payment of $2,610, which includes principal and interest. In this scenario, John is providing the primary financing for the property, and Sarah is making regular mortgage payments to him.
2. Seller Take Back Mortgage as a Second Mortgage: Let’s say that Tom wants to buy a property from Jane for $700,000. Tom has been approved for a traditional mortgage of $500,000 but needs an additional $200,000 to cover the purchase price. Jane agrees to provide an STBM as a second mortgage for $200,000 at an interest rate of 8% with a repayment period of 15 years. Tom and Jane agree to a monthly payment of $1,834, which includes principal and interest. In this scenario, the traditional lender is providing the primary financing for the property, and Jane is providing a second mortgage to help Tom cover the purchase price.

What Are the Benefits of Providing a Seller Take Back Mortgage?

Here are some potential benefits for a seller who offers an STBM in Canada:

• Increased pool of potential buyers: By offering STBM, a seller can open up their pool of potential buyers to those who might not qualify for traditional financing due to various reasons such as a poor credit score or limited employment history. This can lead to a faster sale of the property.
• Higher purchase price: Since STBM can be an alternative financing option for buyers, the seller may be able to negotiate a higher purchase price for the property.
• Steady cash flow: As the seller will be receiving regular mortgage payments from the buyer, they will have a steady cash flow stream which can be useful for the seller to finance other investments or cover expenses.
• Tax benefits: Offering an STBM can offer tax benefits for the seller as they can spread their capital gains tax liability over a longer period of time.
• Flexibility in financing terms: The seller has more flexibility in setting the financing terms such as interest rate, payment schedule, and repayment period, which can be beneficial for both parties.

What Are the Risks of Providing a Seller Take Back Mortgage?

While STBMs can be a useful financing option, they also come with certain risks for both the seller:

• Risk of default: As the seller is acting as the lender, there is a risk that the buyer may default on the loan. This could lead to financial losses for the seller and a lengthy legal process to try and recover the property.
• Limited liquidity: By tying up the financing of the property with the STBM, the seller may find it difficult to access the full value of their property if they need to sell it quickly for any reason.
• Lower sale price: While offering an STBM may attract more potential buyers, some buyers may be hesitant to purchase a property with this type of financing as they may be able to secure more favorable terms from a traditional financial institution. This could lead to the seller having to lower the sale price of the property to attract buyers.
• Increased administrative burden: As the seller is acting as the lender, they will need to be involved in the mortgage underwriting process and will need to service the loan throughout its term. This can be an administrative burden for the seller.
• Dependent on buyer’s financial situation: The seller’s ability to receive regular mortgage payments is dependent on the buyer’s financial situation. If the buyer experiences financial difficulties, the seller may not receive regular payments or may need to foreclose on the property.

What Are the Benefits of Seller Take Back Mortgage to a Home Buyer?

Here are some potential benefits for a buyer in Canada to consider when considering an STBM:

• Easier to qualify: For buyers who may not qualify for a traditional mortgage due to a poor credit score or a lack of credit history, an STBM can be an alternative financing option. The seller may be more flexible in their underwriting criteria, which can make it easier for the buyer to qualify.
• Lower closing costs: STBMs can have lower closing costs than traditional mortgages since there may be no need for an appraisal, survey or title insurance. This can reduce the overall cost of purchasing a property.
• Negotiable terms: Since the seller is the lender, there may be more flexibility in the terms of the mortgage such as interest rate, payment schedule, and repayment period. This can allow the buyer to negotiate more favorable terms.
• Faster closing process: Since the financing is arranged between the buyer and seller, the closing process may be faster and more straightforward than with a traditional mortgage.
• Opportunity for creative financing: An STBM can allow a buyer to structure the financing in a way that is unique to their situation. For example, the buyer could negotiate a lower down payment or a balloon payment due at a later date.
• Greater control: Since the seller is acting as the lender, the buyer may have more control over the mortgage terms and the overall financing process. This can lead to a more personalized and customized financing experience.

What Are the Risks of Seller Take Back Mortgage to a Home Buyer?

While there are some potential benefits to consider when considering a Seller Take Back Mortgage (STBM) as a buyer in Canada, there are also some potential negatives to consider:

• Higher interest rates: The interest rate on an STBM is often higher than that of a traditional mortgage, as the seller is taking on additional risk by acting as the lender.
• Shorter repayment period: An STBM often has a shorter repayment period than a traditional mortgage, which can result in higher monthly payments for the buyer.
• Higher down payment: The seller may require a higher down payment than what is typically required for a traditional mortgage, which can be a barrier for some buyers.
• Limited availability: STBMs are not as common as traditional mortgages, which means that they may not be available for all properties and sellers.
• Limited options: Since the financing is arranged between the buyer and seller, the buyer may have fewer options for financing terms than they would with a traditional mortgage. This can limit the buyer’s ability to negotiate favorable terms.
• Risk of default: The seller may require a higher interest rate or down payment to offset the risk of default. If the buyer defaults on the loan, the seller may foreclose on the property and the buyer may lose their investment.

What Market Conditions is a Seller Take Back Mortgage Best?

Here are some market conditions in which an STBM can be a good option for buyers and sellers:

1. Limited availability of traditional financing: When traditional financing options are scarce, such as during a credit crunch, an STBM can be a good option for buyers who may not qualify for traditional financing due to a lack of credit history, a poor credit score, or other factors.
2. Low interest rate environment: In a low interest rate environment, an STBM can be a good option for sellers who want to earn a higher return on their investment than they would with traditional fixed-income investments, such as bonds or savings accounts.
3. Seller’s market: When there is a seller’s market, where there are more buyers than properties available, an STBM can be a good option for sellers who want to attract a larger pool of potential buyers by offering flexible financing terms.
4. Stagnant real estate market: In a stagnant real estate market where properties are slow to sell, offering an STBM can make a property more attractive to buyers by offering alternative financing options.
5. High demand for investment properties: In a market where there is high demand for investment properties, sellers can offer an STBM as a way to attract investors who are looking for alternative financing options.

It’s important to note that market conditions can change quickly, and what may be a good option today may not be a good option tomorrow. Buyers and sellers should carefully consider all their financing options and seek professional advice before entering into any STBM agreement.

Legal Requirements for a Seller Take Back Mortgage

In Toronto and across Canada, STBMs are subject to certain legal requirements. These include a limit on the interest rate, a clear outline of the terms of the loan in a written agreement, and ensuring that the buyer has a clear understanding of the terms of the loan and is able to make the necessary payments.

How Does a Home Seller Give a Seller Take Back Mortgage?

If you’re a seller in Toronto and you’re interested in offering an STBM, there are a few steps you’ll need to take. First, you’ll need to consult with a real estate lawyer who can help you draft a written agreement that outlines the terms of the loan. You may also want to work with a mortgage broker who can help you find potential buyers who are interested in STBMs. Additionally, it may be beneficial to market your home as offering a STBM to qualifying buyers through your real estate agent.

What Are the Best Practices for a Seller Take Back Mortgage?

To minimize the risk of default, it’s important to carefully evaluate the buyer’s creditworthiness and ability to repay the loan before considering an STBM. Additionally, you should consider requiring a down payment of at least 10-20% of the purchase price and setting a maximum loan-to-value ratio. Work with a real estate lawyer to draft a clear and comprehensive agreement that outlines the terms of the loan, offer a competitive interest rate, and ensure that the buyer has obtained title insurance and has completed a thorough inspection of the property before the sale is finalized.

Conclusion

In conclusion, STBMs can be a useful financing option for both buyers and sellers in Toronto’s real estate market. However, it’s important to carefully evaluate the risks and legal requirements before deciding to offer or take out an STBM. Work with experienced professionals, such as a real estate lawyer, mortgage broker, and real estate agent to ensure that you’re complying with all legal requirements and that you’re offering fair and reasonable terms to potential buyers.