Mortgages: You can take them or leave them

Garry Marr, Financial Post · Friday, Sept. 24, 2010

It’s hard to imagine, but there was a time when the mortgage on your home was something a buyer wanted to take off your hands.

But who can remember the 1980s and double-digit inflation, when a single-digit mortgage rate was gold? I was just a teenager then and the mortgage was my father’s problem.

But could a rising rate environment, if that actually happens, make the mortgages we are locking into today valuable in the future?

A survey released by Toronto-Dominion Bank this past week found 60% of repeat home buyers don’t know they have options when it comes to their current mortgage.

“Rates today could become attractive two years from now,” says Farhaneh Haque, regional sales manager of mobile mortgage specialist with TD Canada Trust.

The same survey found only 33% of repeat buyers bring their current mortgage with them to their new home and just 8% use it as selling feature of the home they are leaving, allowing the new owner to assume their mortgage.

“A mortgage assumption means we have to qualify the new buyers. The cost is minimal, but it is a full qualification of the new buyers,” says Ms. Haque, acknowledging in the current market there are very few assumptions.

“With rates having declined, no buyer is going to pay 6% when they could get 4% in the market.”

Don Lawby, chief executive of Century 21 Canada, has been in the business long enough to remember a time when if you had a low mortgage rate on your home, it became a major selling feature and worth more money. A car worth $35,000, for example, is much more attractive with 0% financing.

“It would have a lot of value on it. It depended on what you were going to do. You might try and take the loan with you. Generally speaking, when you are selling, you are going to buy another house,” Mr. Lawby says.

Another product from another real estate age that could rear its head in this market is something called the vendor take mortgage. Canada Mortgage and Housing Corp. describes this as the vendor, rather than financial institution, financing the mortgage.

You essentially loan someone money so they can buy your house. They take title to the property and make mortgage payments to you.

“I think we are going to see more and more of them now with the market slowing down and tighter regulations [for mortgages at government-regulated financial institutions],” says Mr. Lawby, who remains somewhat wary of the vendor take back mortgage. “If I’m selling a house, I don’t want to think about it. I’m gone.”

Vendor take backs are generally used because the purchaser can’t qualify for the mortage or to induce somebody to buy by offering them a very low rate.

But Ron Cirotto, who runs the website, says buyers should be very careful about being blinded by a low rate. In some cases, sellers will lower your rate for cash upfront. “Somebody says, ‘I know rates are 9% rate now, but if you give me $6,000, I’ll give you 7%. You have to connect the dots,” Mr. Cirotto says. The savings from the lower rate could be less than the cash you are paying up front.

In a market where returns from investment certificates and government bonds are small, providing a mortgage on your old home sounds like a pretty attractive investment.

But mortgage broker Vince Gaetano points out there is risk for the seller, too. You may know the home you’re selling and providing a mortgage on, but how well do you know the buyer?

“Your investment is not liquid. There is more risk,” says Mr. Gaetano, who does see more and more private individuals funding second mortgages because a lack of other investment opportunities.

But as for vendors taking on mortgages to sell their homes, there is one major problem. Most people selling a home need the cash to buy another one.

“Anybody selling needs the money,” Mr. Gaetano says.

Pam Martin of Invis, Mortgage Broker – Kelowna,Vernon, Penticton, Okanagan, British Columbia, Canada