Just how much has the Greater Toronto Area housing market changed since the introduction of the Ontario Fair Housing Plan? The re-emergence of tactics usually absent in a hot market – such as vendor take-back mortgages – is a strong indicator.
These mortgage sharing arrangements used to be a rarity, but have become more commonplace in the Toronto real estate market in recent months.
What is a Vendor Take-Back Mortgage?
A vendor take-back mortgage is an arrangement where a seller lends a buyer part of the final sale price. It’s usually because the buyer is short on financing and – rather than let the deal die – the seller steps in to help push the purchase over the line. It results in the buyer having two financing loans – one to their mortgage lender, and one to the seller.
Darren Robinson is a mortgage broker based in Barrie, Ontario and has observed vendor take-back mortgages making a comeback in the GTA.
“We have been dealing with it quite a bit because of the change in valuations of houses,” he says. “If you purchased your house in the spring during the height of the market, and the value has since dropped off, the lender will do an appraisal of the property. They generally do it about 30 days out from the close date.”
With home values decreasing in recent months, an appraisal may not signal good news for the buyer, and any lag on the appraisal can put the final sale in jeopardy. If the property’s value has nosedived during the closing period, the lender will require the buyer to make up the difference. It’s not something a buyer may have considered, and will require renewed negotiations with the seller.
“It would mean the buyer going back to the seller to say they are short on money, with no other access to get the money together,” says Robinson. “They would look for a reduction in the price of the property, or would request a vendor take-back mortgage.”
It’s not an ideal situation, but there are benefits for both the seller and buyer. For the buyer, they get the home they wanted for the agreed price, albeit with two loans now to pay back. For the seller, they also get most of the agreed sale price up front, with a smaller portion coming in installments in the form of loan repayments and interest. The alternative is likely court proceedings, which is an outcome that both sides will always want to avoid.
“If it goes to court then you lose your deposit, and then the seller will generally sue for the difference on the firm offer they had originally and what they sell for later when they move onto another buyer,” says Robinson. “They will sue for the difference and any costs involved as well.”
How is an Appraisal Conducted?
An appraisal on a home is based on the current market and how much the property would likely sell for over the next 60 days. It means pricing your home realistically is even more important, lest you end up in court down the line when a deal goes sour. In Robinson’s view, the chances of that happening now as we approach the end of the year are much lower than in the summer.
“It has definitely leveled out, the appraisals and the sale prices are now matching up,” he says. “There was discrepancy there for a number of months and it left some people in tough positions.”
Buyers taking on too much debt was one of the main reasons for the Ontario government’s Fair Housing Plan in April. It is also why we have new mortgage qualifying rules coming into effect this January, which will have obvious implications for those planning to sell their home next year.
“I know when we had the qualifying standard brought in last November, it took away about 20 per cent of the buying power from first-time home buyers,” says Robinson. “Now you will see that wash down to people that have larger down payments, who will be in the same situation. I definitely think you will see a drop in prices and volume as there is less money out there.”