alternative financing

The search: As the child of canoe-toting itinerants, sharing a tent with my sisters or the back of the Volvo wagon with our epileptic dog, I dreamt as a kid of a cabin to one day call my own. There was a secluded point on one of the Algonquin lakes we frequented in my youth where you could make out the remains of an old ranger’s abode.

I paced it off one time, two feet per step. It was 16-by-20. That, I thought, would be perfect for me.

Finding my 320 sq. ft. of bliss, on a 2.6-acre nook of Panache Lake, Ont., turned out to be a cinch. It popped up immediately in an online search in the fall of 2017 and, within a week, the owners had accepted my $180,000 offer (about 10 per cent less than the asking price)—conditional on financing. That’s when the real hunt began.

The first banker I approached advised me to “walk away from it,” citing the lack of amenities and a driveway as cons. Needless to say he wouldn’t give me a mortgage; nor, he predicted, would any other institution. That proved true when the credit union also shot me down.

My dream shack, I learned, fell into the category of a Type B cottage, being wood-heated, uninsulated, and unequipped with a water filtration system. These types of rustic getaways are trickier to mortgage than a Type A, which have permanent foundations and heat sources, along with year-round access. It’s okay if your Type B sits on blocks—or even rocks, as is the case for mine—but most banks will balk if you don’t have a proper chamber for ablutions (a.k.a. an outhouse won’t cut it).

I turned to Durham-based broker Steve White, who looked far and wide, including among B- and C- lenders—outfits or individuals who might not be so picky about things like a three-piece bathroom, the absence of which was a sticking point for the A contingent, owing to mortgage insurance rules.

The compromise: White exhausted all his options but suggested, as a last-ditch, I might propose a vendor take-back mortgage. “A what?” I said. This alternative, he explained, is like an owner holding a mortgage, except that the buyer in a VTB scenario obtains title to the property and can put it back on the market, if so desired, at any point, as long as they pay off the balance owed to the previous owners. In a nutshell, it involves the seller agreeing to become the lender, and getting paid off, with interest, over a period of time, instead of all at once.

The concept was new to the sellers too. They hadn’t done anything like it, or even heard of it for a cottage. The couple gave me a tour of their Panache Lake place before I made my offer. Because they were selling privately and they had met me, our arrangement seemed trustworthy.

The owners confessed that they still did a bit of digging on me (thankfully I only have one speeding ticket and have mostly made fans through my journalism) before agreeing to the scheme, which effectively made them my bank.

They had to assume a certain risk, but they said that they wanted to sell to a nice person who would enjoy it. In the end, it’s still a business transaction, so the couple had to do their homework. Having a formal mortgage agreement in place was important to ensure both parties had some security.

The silver lining: I got my cabin on a secluded point. The sellers got a smaller capital gains hit, as the gain gets spread out over a period of years. I didn’t have to install a septic field or holding tank, as a traditional lender would have required. The previous owners got a pretty good sense that I was in this for the long haul and wasn’t going to rent the place or flip it.

Photo by Jim Moodie

Bonus: They left behind a bunch of cassette tapes and don’t mind that I am enjoying them to this day.

Owner advice: The pros and cons of a vendor take-back mortgage

PRO: A vendor take-back mortgage will only intrigue those sellers who can afford to get their money over time. They will get extra income, but may not want the spectre of their borrower potentially defaulting.

CON: For the buyer, it is typically more costly; the interest rate and repayment schedule are up to the people who are willing to back you. (I got 6 per cent over 20 years.) But if done correctly, a VTB is really no different than a bank mortgage.

PRO: You hold the deed, and the deal can be structured so that you can pay out the lender at any time, without penalty.

Have you recently purchased a cottage? Tell us about it: edit@cottagelife.com.

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Canadian cottage prices are still at record-highs despite the economy inching towards a recession. That’s why cash-strapped buyers are increasingly turning to an alternative financing options to purchase a cottage, including vendor take-back (VTB) mortgages.

With a VTB mortgage, the property seller is the lender. “No bank or mortgage broker is necessary with a VTB,” says Andrew Thake, a mortgage broker in Ottawa. “It’s essentially a private loan agreement between a seller and buyer.”

A VTB is often utilized as a second mortgage that supplements an initial mortgage from a traditional lender such as a bank. “The VTB can bridge the gap when a bank is unwilling to finance the entire purchase price of a property, and the buyer doesn’t have enough of a down payment to cover the rest,” says Thake.

Because conventional mortgage interest rates are on the rise, Thake adds it’s actually sellers who typically instigate a VTB to help close a sale when they’re having trouble finding a buyer. For example, buyers might struggle to qualify for mortgages on unique cottage properties that don’t meet major lender requirements. “You see this especially with remote properties without much direct access, or cottages that lack potable water,” says Thake. In those cases, or in other scenarios where their cottage simply isn’t attracting buyers, sellers can entice offers in this tough economy by proposing a VTB with generous terms.

If the terms are right for both parties, a VTB is a win-win: the buyer is able to afford their cottage, while the seller successfully closes a property that would otherwise have no takers— with the bonus of earning added profit from the VTB interest.

For sellers who prefer a clean break once the sale closes, Thake cautions that a VTB can potentially lead to an unwanted ongoing relationship with the buyer. “They will be more inclined to ask questions like, ‘how do you winterize this?’ or ‘where did you put the lock to the shed?’ if their financial commitment to you extends beyond closing,” he says.

Thake also advises transparency with all other parties when a VTB is in place: a bank may adjust its financing if it discovers an undisclosed agreement between the seller and buyer. “If everyone knows the numbers, there aren’t any unwelcome surprises.”