Owner financing, also called owner-seller financing or owner-to-owner financing, allows buyers to purchase a home directly from the seller. In this arrangement, the seller acts as a lender. This alternative to traditional financing allows for a faster closing and helps buyers who have credit issues.
With owner-seller financing, the seller and the buyer agree on a purchase price, a down payment, an interest rate, and repayment terms. The title is transferred to the buyer immediately, but the seller registers a mortgage against the property. The buyer makes monthly payments to the seller, the same way they would to a bank. Once payment has been made in full, the mortgage is discharged, and the property’s title is clear.
How Does Owner-to-Owner Finance Work in Canada?
These are the typical steps to owner financing in Canada:
Finding a Property with Owner Financing
In Canada, owner financing opportunities are relatively rare, and they aren’t advertised. A buyer might find them through:
- Real estate listings that specifically mention “owner financing available” or “VTB,” which stands for Vendor Take-Back, the legal term used in Canada.
- Direct negotiations with a seller who’s having trouble selling.
- Working with a real estate agent to approach sellers with the possibility.
- Private sale situations.
Negotiating the Terms
Unlike a traditional mortgage, where the bank sets most of the terms, owner financing is entirely negotiable between the seller and the buyer. They need to agree on:
- Purchase price.
- Down payment (usually higher than with traditional mortgages).
- Interest rate (could be higher or lower than bank rates).
- Amortization period (often shorter than traditional mortgages).
- Payment schedule (monthly payments, balloon payments, etc.).
- Default terms (what happens if the buyer can’t make the payments).
Getting Legal Documentation
In an owner-seller financing agreement, both the seller and the buyer have their own lawyers.
The seller’s lawyer will:
- Review the Agreement of Purchase and Sale.
- Draft or negotiate the vendor take-back mortgage terms.
- Review the final mortgage document.
- Ensure the mortgage includes proper default clauses, enforcement rights, interest provisions, insurance requirements, and acceleration clauses.
- Confirm the mortgage is registered correctly.
- Prepare and register a discharge of mortgage when the loan is repaid.
The buyer’s lawyer will:
- Review the agreement of purchase and sale.
- Review the vendor take-back mortgage terms.
- Prepare the transfer/deed.
- Prepare the mortgage document.
- Register the transfer on title.
- Register the mortgage against the title.
- Ensure the mortgage is registered in the correct priority position (i.e. first mortgage, second mortgage).
Making Payments
Once everything is signed and the buyer takes possession, they make regular payments to the seller according to the agreement. These payments typically include both principal and interest, just like a regular mortgage.
Paying Off the Owner-Seller Finance
Most owner financing includes a balloon payment or a relatively short term (3-5 years is common). This means the buyer might make payments for a few years and then need to either pay off the remaining balance in full, renegotiate with a traditional lender, or renegotiate with the seller for an extension.
Why Do Sellers Offer Owner Financing?
Owner financing comes with risks and administrative hassles. But there are good reasons why some sellers consider it:
- Steady income stream: instead of getting a lump sum, they receive monthly payments with interest, sometimes at a better rate than they’d get from other investments.
- Difficulty selling: if the market is slow, the property needs work, or it’s in a less desirable location, offering owner financing can attract more potential buyers.
- Tax benefits: In some cases, spreading payments over multiple years may allow capital gains to be reported over time and reduce the immediate tax impact. Sellers should consult with a tax accountant before offering owner financing.
- Potential for a higher sale price: Offering flexible financing can justify a slightly higher price for the property.
- Retirement income: someone who’s downsizing or retiring might want a predictable monthly income rather than managing a large sum.
Why Do Buyers Seek Out Owner Financing?
From the buyer’s perspective, owner-to-owner financing is appealing for several reasons:
- Credit challenges: if a buyer has credit issues, a recent bankruptcy, or income that’s hard to verify, they might not be able to get financing from a traditional lender.
- Faster closing: without bank underwriting, appraisals, and all the paperwork required for a traditional mortgage, a deal can close much faster.
- Flexible terms: everything in an owner financing agreement is negotiable, including the down payment, interest rate, payment schedule, and purchase price.
- Lower closing costs: buyers save on some of the typical mortgage-related fees, although they’ll still need a lawyer and potentially other services.
- Unique properties: if the property is unusual or unconventional, banks might not be willing to finance it, but an owner might.
Downsides of Owner Financing
Owner-seller financing isn’t all sunshine and roses. It comes with drawbacks for both sides:
For buyers, the disadvantages are:
- Higher interest rates: sellers often charge above-market interest to compensate for their risk.
- Larger down payments: buyers should expect to put down more than the typical 5 – 20% they would with a traditional mortgage.
- Balloon payments: if the buyer can’t refinance or pay the balloon payment when it’s due, they could lose the property.
- Due-on-sale clauses: if the seller still has a mortgage on the property, their lender might have a due-on-sale clause, which requires full payment of the mortgage when the property changes hands. Most traditional mortgages in Canada have this type of clause, and it can complicate the situation for owner financing.
- Less consumer protection: buyers don’t have the same regulatory protections as they do with a major financial institution.
- Seller default: if the seller doesn’t pay their existing mortgage (while you’re paying them), the bank could foreclose on the home, leaving the buyer out in the cold.
The risks for sellers are:
- Buyer default: if the buyer stops paying, the seller has to go through the foreclosure process to get the property back.
- Tied-up capital: the seller’s money is locked in the property instead of being available for other uses, such as investments.
- Property management: until the loan is paid off in full, the seller must exercise a level of oversight about the property’s condition.
Canadian Considerations
Owner financing is more common in the United States than in Canada. It’s important to review the Canada-specific issues buyers and sellers need to know:
- The Canadian mortgage market is heavily regulated and competitive, so traditional financing is usually available. Owner financing is the exception.
- Real estate law varies from province to province, so the specific legal requirements and processes may differ depending on where you’re buying.
- Normal rules like the mortgage stress test don’t apply with owner financing. This also means that most of the normal consumer protections aren’t applicable.
- Tax implications vary. Both buyers and sellers should consult with an accountant to get a clear picture of how owner financing could affect their taxes.
Is Owner Financing Right for You?
Owner financing can be a great solution in specific situations, but it’s unusual in Canada, and it’s not for everyone. It makes the most sense when:
- You have credit challenges, but a stable income and can afford the payments.
- You’re buying a unique property that traditional lenders won’t finance.
- You’re confident you can refinance with a traditional lender before the agreement is over.
- Both you and the seller understand the risks and have good legal and tax advice.
- The terms make financial sense compared to other options.
If, however, you qualify for traditional financing, can’t afford a substantial down payment, and aren’t confident about being able to refinance within the required time frame, owner financing probably isn’t for you.
Owner Financing
If you’re considering owner financing, whether as a buyer or seller, the most important thing is to do your research and get sound professional advice. Understand the terms, be wary of anything that makes you suspicious, and make sure the deal truly works for you and your current situation.
