To "take back" or not to "take back"!

Under most conditions the best way to sell your property is without passing on the mortgage — known as a "cash deal". A cash deal means the purchaser has arranged his or her own financing, should he or she need it, and will pay the full purchase price in cash on closing. In turn, you agree to pay off all outstanding mortgages when the sale of the property is finalized.

There are two other alternatives to the cash deal:

• Your mortgage(s) can be "assumed" by the purchaser. Assuming a mortgage means that the purchaser takes over full legal responsibility for your current mortgage and will make all future payments, subject to the approval of the mortgagee.

•  If your mortgage is at a lower interest rate than current rates and still has at least a year of its term to run, this can be presented as another attractive "feature" of your property. If the purchaser can assume this bargain mortgage, they will consider themselves fortunate. You can help with this type of financing by providing copies of the mortgage documents for the purchaser's lawyer and by introducing the purchaser to your bank manager.

•  You can decide to finance the sale yourself and "take back" a mortgage. Taking back a mortgage occurs when you, the vendor, personally offers the purchaser a mortgage loan as part payment for the purchase price. We advise you to discuss the implications of this with your lawyer and financial advisors.

•   The rates for first mortgages, "taken back" by the seller are generally higher than the going rate, and the purchase price is increased to benefit the seller in lieu of "cash up front".

•  If you can "take back" a mortgage at a slightly lower rate than financial institutions are offering, your property will be more attractive, especially to those who are buying for an investment.

•   The purchaser may have only a small down payment and therefore need a second or third mortgage. Lending institutions will not usually give second mortgages if they already hold the first mortgage. The institution that offers second and third mortgages charges higher rates of interest — usually 2 percentage points higher than a first mortgage rate. This is because they are taking a greater risk, as they have second or third call on proceeds from the property if it must be sold.

•   If you decide to act as a second or third mortgagee, you could charge an interest rate below the going rate charged by financial institutions for these types of mortgages — usually one percentage point. This adds another selling feature to the deal.

•   If you decide to offer the purchaser a mortgage, you must ensure that they are a good risk. Request references and confirmation of their income. Ask your bank manager for assistance to obtain a credit report. These vital steps must be taken before you sign any documents.

•   There is a certain amount of risk involved in entering into an additional mortgage but if the borrower is found to be sound and your lawyer and financial advisors give you the go ahead, this could prove to be a good investment for you.

•   You can choose to assign this mortgage to a third party to whom the buyer must make his payments. You may find such a party yourself or there are mortgage brokers who specialize in these matters (speak to your lawyer). 

DISCUSS YOUR MORTGAGE WITH AN EXPERT!

Because of the complexities of mortgage financing, we suggest that you discuss the merits of your current mortgage with your bank or trust company manager who will advise you as to the best decisions to make.

Ask such questions as:

•   What are the pros and cons of discharging my mortgage(s) as opposed to allowing the purchaser to assume it?

•  Do I have to pay a penalty in order to discharge my mortgage(s)?

•  Are there times when I can pay off more of the principal (called "prepayment privileges")?

•   Can a purchaser assume my current mortgage(s)?

Remember, although this is an area that you may feel insecure about because of lack of knowledge, someone out there with your best interests at heart can help!