Is It Possible to Buy a Property in Montreal with $0 Down Payment? Yes, It Is!
07/06/2024
Introduction
Is it still possible to buy a property with $0 down payment? The answer is yes, partly thanks to the vendor take back (VTB) mortgage.
What is a Vendor Take Back (VTB) Mortgage?
You may have heard of the vendor take back (VTB) mortgage under other names: balance of sale, balance of purchase price, or seller financing. In English, it's referred to as vendor take back, balance of sale, or seller take back.
A VTB mortgage represents the difference between the seller's asking price and the liquidity the buyer has available to purchase the property. This amount can be credited by the seller, thereby providing part of the necessary down payment.
In other words, the seller lends money to the buyer to help finance the down payment. This is a technique I frequently use to sell my own properties.
However, a VTB mortgage only works if there is sufficient equity in the property. Normally, no more than 20% of the sale price is financed with a VTB mortgage. Although it’s possible to finance up to 100%, this is very rare.
Bank Financing and the Vendor Take Back Mortgage
Does a VTB mortgage seem like a miracle solution? Do you think it could enable you to make endless great deals? While it is indeed a creative financing solution, there are some caveats.
But beware! Most banks do not share this enthusiasm for VTB mortgages. Some banks will agree to provide a second mortgage, but not all of them will.
Additionally, banks generally require you to provide a portion of the down payment out of your own pocket. If 100% of the down payment is financed through a VTB mortgage, the bank will consider you unserious since you are taking no risk.
Repaying a Vendor Take Back Mortgage
There are several ways to repay a VTB mortgage. You need to agree with the other party on the method that suits you best. Here are the three most popular methods:
1. Principal and Interest
This method is similar to a bank mortgage, where each payment includes both principal and interest.
2. Interest Only
With this method, the borrower only repays the interest during the term of the VTB mortgage. The payments are smaller, but the seller accumulates more interest in the end.
3. Balloon Payment
In this method, no interest or principal is repaid during the term. The entire amount is repaid at the end, allowing the buyer to have more liquidity at the time of purchase but resulting in more interest paid at the end.
Why Would a Seller Opt for a Vendor Take Back Mortgage?
There are several situations that may lead a seller to consider a VTB mortgage. For example, a seller looking to sell quickly to retire might find this option appealing.
In short, a VTB mortgage can expedite the sale of a property. Additionally, it allows deferring part of the capital gain for up to five years, postponing the taxation on this gain.
Finally, the interest income generated by a VTB mortgage is often higher than most traditional investments (GICs, bonds, mutual funds, etc.).
Advantages for the Buyer
If well-structured, a VTB mortgage can benefit both the seller and the buyer. For the buyer, it offers the following advantages:
- Lower initial down payment
- Higher return on investment for the down payment
- Flexibility in loan repayment
- Lower interest rate compared to private lenders
Challenges of a Vendor Take Back Mortgage
Rather than discussing disadvantages, let's look at these as challenges:
- The seller needs all their money immediately
- You are in a multiple offer situation
- Choosing the wrong bank for the first mortgage (Many banks do not accept financing a property with a VTB mortgage.)
- VTB mortgage is too risky (The property must be profitable, and you need some financial leeway.)
Conclusion and Resources
In conclusion, the best way to determine if a VTB mortgage can help you buy or sell a property is to discuss it with the buyer or seller. Ask! The worst that can happen is they say no, which isn't so bad, right?
If the seller has never heard of a VTB mortgage, you or your real estate broker need to be ready to explain how it works and demonstrate your ability to repay the debt.
For more information, check out these resources:
- Government of Canada - Property Valuation
- Bank of Canada - Mortgage Rates
- Real Estate Broker Montreal - Équipe Tardif
By using this information, you can maximize your real estate investment opportunities.
