Vendor take-back mortgages help buyers get into the market

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VTB mortgages are one to 1.25 per cent below conventional rates, and require less documentation

The typically scorching spring market is off to a frigid start.

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Economic uncertainty stemming from Canada’s trade war with the United States and it having the G7’s highest debt-to-income ratio has nervous homebuyers planted on the sidelines.

Consequently, home sales in the GTA declined by 23 per cent year-over-year in March, according to the Toronto Regional Real Estate Board, which noted the upcoming federal election is also stoking uncertainty.

Dunpar Homes, however, has a countervailing solution for homebuyers struggling to qualify for mortgages. The developer is offering a five-year vendor take-back (VTB) mortgage at 2.99 per cent to buyers who put 20 per cent down.

Dunpar is only offering the VTB at Streetsville Centre, the 194-unit townhome project in the quaint urban Mississauga village it’s named after. And with up to three bedrooms, prices begin at $1.1 million.

But according to Harpreet Bassi, VP of finance at Dunpar Homes, qualifying for the VTB mortgage isn’t as daunting as the sticker prices might suggest, because it’s underwritten in-house.

“Our underwriting standards are not as strict as the B-20 mortgage stress test,” he said. “We realize people have to live, and they can with a comfortable debt-to-service ratio. Our number gives them more room to breathe.”

Dunpar’s VTB is one to 1.25 per cent below conventional mortgage rates, and requires less documentation which, Bassi added, makes it attractive for new-to-Canada and self-employed purchasers — two cohorts from whom banks demand extensive financial documentation.

“It can be prepaid at any time but you have surety for five years, so — looking at monthly payments —it’s a flexible option for new homebuyers or investors, giving them maximum amount of cash flow and downside protection,” Bassi said. “So if the market falls more, they can go get a conventional mortgage from the bank and pay down the principal.”

Vendor take-backs are uncommon because developers assume heavy risk. Industry veteran Scott McLellan, COO of Plaza Corp., hasn’t seen many VTBs but says they could make sense for deep-pocketed developers.

“The developer eats a little bit,” he said, “but at least they get another sale and closing done, and the purchaser gets a home they otherwise wouldn’t have gotten.”

McLellan noted VTBs require “digging into our own pockets and profits, but if what we’re trying to do is keep deals secure, then maybe that’s better than taking the unit back.”

Dunpar’s VTB risk is mitigated with the 20 per cent deposit — an amount with which Bassi says purchasers are likelier to close, but if they can’t, it’s refunded and the unit goes back on sale. And while developers often sue buyers who can’t close, that wouldn’t happen at Streetsville Centre.

“It’d be a mutual release — we give back their deposit and take the unit back because we’re confident in the product,” Bassi said. “That works in the buyer’s favour too.”

The owner of Pekoe Mortgages says purchase activity in the Greater Golden Horseshoe remains unusually soft into April, despite decreasing home prices, because exorbitant household debt makes mortgage prequalification cumbersome.

“The stress test makes it difficult for buyers, even with amortization periods extending to 30 years,” Daniel Johanis said. “It’s not that people don’t want to buy; they do, but can’t.”

That’s why Johanis is surprised VTBs are still uncommon.

“The vendor basically acts as a private lender but with more favourable conditions because they make money on the end product, so the profit margin is built into it,” he continued. “VTBs are a smart way to sell preconstruction right now if you have the liquidity to offer them.”