Mortgage and VTB Assumptions in a Rising Interest Rate Market – Financial Services
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In light of substantial increases in interest rates, home buyers are looking for alternative loan terms. Some alternatives include assuming existing mortgage debt, which would typically require the consent of the lender, or constructing a repossession mortgage by the seller at the purchase transaction.
Mortgage assumption allows a buyer to assume the property’s existing mortgage as-is, with the same principal balance, interest rate, and repayment terms.
If the existing mortgage loan to be assumed is insufficient, the borrower/buyer may ask the lender to “combine and extend”, which means that the mortgage loan would be increased by additional funds at the current interest rate and/or that the term of the loan would be extended.
The purchase and sale agreement must include: 1) the concept of mortgage assumption; 2) which party is responsible for coordinating the lender’s consent; and 3) who is responsible for the lender’s costs (assumption fees, legal fees, etc.).
The final decision on the approval of a mortgage assumption rests with the lender, as it is rare for a mortgage to allow the borrower to assign the mortgage without the lender’s consent. The lender will review the terms of the loan, the creditworthiness of the new borrower and may request additional collateral.
Another alternative lending arrangement is the seller’s repossession mortgage (“VTB“), where the seller “takes over” a mortgage from the buyer as part of the buy-sell transaction.
When establishing a VTB mortgage, the purchase document should include the VTB terms outlining the loan amount, interest rate, term, prepayment ability, etc.
Borrowers can use a VTB strategy when their first mortgage does not provide sufficient financing for the purchase transaction. In this case, ensure that the first mortgage lender authorizes VTB secondary financing and that the VTB terms of the purchase agreement explicitly authorize first mortgage financing and require the VTB holder to enter into a subordination agreement.
A VTB can be an attractive alternative for sellers as it generates income from interest earned over the term of the VTB and defers taxes on the capital gains from the sale.
Ultimately, mortgage assumption and VTB are attractive alternatives for borrowing in a high-interest market. A PDF version is available for download
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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