100K VTB - 3 yrs or 5 yrs?

[Nir]

Hi,

which VTB option is more common - 1 yr term, 3yrs term OR 5 yrs term?

term meaning at the end of the term you have to pay full principle back. also, is it common/reasonable to ask to pay interest only at the end of the term together with principle, instead of monthly?

THANKS.

 

[markl]

There is no real common term with a VTB. It is what can be negotiated with the seller and I would target it to be long enough to be able to refinance the property to pay out the balance owing.



The majority of VTB's I have seen are interest only.



Regards,

 

[Thomas Beyer]

Interest only is most common on VTBs. Some VTBs can be negotiated with a balloon payment at the end.



The VTB has to be seen in light of the loan-to-value of both a first plus VTB, the LTV of the first mortgage, the timelines, the % interest on both 1st and 2nd and the experience and networth the borrower.

 

[Nir]

Thanks Thomas and Mark!



Mark, excellent point regarding VTB payment through refinance!

That's why I was surprised the agent suggested only 1 year. well, I am not surprised he wants to make the seller happy, very happy



I think 3 years is much safer if you plan to refinance.



I wonder if you would agree to a 2 years term if you depended on refinance to pay the seller VTB(?)



Regards,

Neil

 

[Thomas Beyer]

[quote user=investmart]

I wonder if you would agree to a 2 years term if you depended on refinance to pay the seller VTB(?)


The VTB has to be paid eventually. This is either from a sale or from a re-finance. Hence, the overall goal for this property has to be known ! Don't ask for a 2 year VTB if you have a 5 year first mortgage as likely you will not have enough cash in 2 years to pay for the VTB. Ask for a 5 year VTB with pre-payment privileges !

 

[Nir]

Hi Thomas,

Thanks!

so VTB term should ideally be > or = mortgage term. Good point.

Obviously a 3 yr VTB with 5 yr mortgage can still be better than NO VTB with 5 yr mortgage

but the first above is preferred.

(I guess you can also reduce mortgage term to 3 yrs, in this example, if seller insists on 3)

Cheers,

Neil

 

[Thomas Beyer]

[quote user=investmart]Obviously a 3 yr VTB with 5 yr mortgage can still be better than NO VTB with 5 yr mortgage but the first above is preferred.


any mortgage has to be repaid .. you are just offloading the problem into the future if there is a mis-match. A 3 year VTB and a 5 year first mortgage will create a problem in 3 years ! Therefore, get a 3 year first mortgage !



Also: a mortgage has to be serviced, usually monthly, and not every asset is strong enough to allow that !

 

[Nir]

will do.. either 3 and 3 or 5 and 5, but not 3 and 5. Thanks again!