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. <https://www.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.