It's not always possible for buyers or families to figure out financing before making the decision to buy real estate. You may want to sell property amongst family members who do not qualify for a traditional mortgage. Particularly in today's market, the ability for sellers to lend money by way of a vendor take-back mortgage can be a helpful tool in the transfer of property ownership. However, if you're thinking about offering a vendor take back mortgage, there are important regulations to bear in mind.
Introduction to Vendor Take Back Mortgages
A vendor take-back mortgage can be used when a buyer does not tender the full price at closing or does not use a traditional mortgage to finance the purchase. The seller agrees to let the buyer pay a portion of the purchase price, with the remaining amount being provided by the seller as a loan. The buyer then repays the loan in installments, or as a lump sum payment at the end of term, and at an interest rate agreed to, similar to a traditional mortgage. Effectively, the seller of the property is also the lender. When selling property to a member of your family, for example, you may want to provide them with a vendor take-back mortgage to help them take their first step into the real estate market.
Regulations for a Vendor Take-Back Mortgagee
Under the Mortgage Brokers Act (the "Act"), a person must not "carry on business as a mortgage broker or sub mortgage broker" unless registered with the Mortgage Brokers Register, which is maintained and overseen by the B.C. Financial Services Authority. When the Mortgage Brokers Registrar assesses whether someone is carrying on business as a broker, the Registrar assesses whether they are arranging mortgages. When granting a vendor take back mortgage, you are potentially arranging mortgages and may need to be registered.
The BC Commercial Appeals Commission has helped clarify when someone might be arranging mortgages. In Horizon Financial Services Ltd. v British Columbia (Registrar of Mortgage Brokers [1990] B.C.C.O. No. 4 ("Horizon"), the court found that the intention of the Act is to license every person or company that is involved in an essential way in arranging mortgages. In Horizon, working with real estate agents to obtain mortgage referrals, soliciting mortgage business from the public, and assisting borrowers in completing application forms were together viewed as participating in an "essential way" in arranging mortgages. Whether you are caught under that umbrella depends on the facts. Other activities that may constitute arranging mortgages are, for example, having direct communications with a client explaining mortgages and mortgage products, or obtaining supporting financial documents from clients such as getting a credit check on a buyer.
While your activities could be considered arranging mortgages, the good news is that you may be exempt from registration. Under the Act's regulations, a person licensed under the Real Estate Services Act is exempt for their activity in facilitating the sale of a vendor take-back mortgage if that activity is ancillary to their role in the transaction giving rise to the vendor take-back. There are no clear rules as to what is considered "ancillary", so it is important to exercise caution when carrying out a transaction.
Conclusion
The Act contemplates more restrictions applicable to vendor take-back mortgages. This is an area with many nuances that can be difficult to navigate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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