Vendor Finance questions

As far as I know, no traditional lender, i.e. bank, building society, etc, will allow you to 'compromise their security', i.e. breach their loan agreement.  If you look at most standard mortgage documentation, you need to get their approval to renovate the property, sell the property and rent the property, among other things. Obviously both they and everybody else ignores these requirements but the 'banks' put these conditions in the paperwork so they remain in complete control, i.e they like to remain in a position where their mortgage documentation allows them to 'call in' the loan when they feel they need to.

On the other side of the coin, a delinquent loan is bad for a traditional lender's balance sheet. The reality is, if the traditional lender gets paid each month, they remain happy and everybody goes about their business.  For example, it's is estimated that 25 to 50 homes per week are sold with vendor finance and this has been happening for years

One of the strange things about traditional lenders' attitude towards vendor finance is the fact that, if you go to any 'branch' you will be told they will not approve what you are proposing. Yet, I have two business associates that got $7 million and $5 million lines of credit from two of the big 4 banks, to purchase residential properties and then on-sell them with Instalment Contracts, while the bank's underlying loan remains in place.

I guess that's the difference between consumer and commercial banking, i.e. one section says no, the other yes. We have built our vendor finance business since 2003 and have never had a challenge with an underlying loan lender. Why? Because we make sure they get paid each month

Also, when asked the following question by an PI insurance underwriter, i.e. '"How does the lender (vendor financier) overcome or address the issue of assignment of property under a mortgage with the financial institution?" the following legal opinion was provided by arguably the most experienced vendor finance solicitor in Australia, Tony Cordato:

'The answer to your question is a technical one – there is no assignment of property in an instalment contract. What happens is that the vendor is entering into a Contract for Sale. It is only on completion that an assignment (known as a Transfer) takes place.

An Instalment Contract is a Contract for Sale with a delayed completion.

The Bank / Lender’s consent is required for all Contracts for Sale, so there is nothing different here from standard procedure.

In terms of timing, a vendor notifies their Bank / Lender that they require a Discharge of Mortgage (by providing a Discharge Authority) shortly before completion is due. I find that Banks will hold open their discharge arrangements for a limited time, each Bank being different. The point is that the Banks do not like being notified a long time beforehand – some like the NAB require completion to take place within about 4 weeks after notification

Therefore, it does not accord with Bank practice to notify a Bank that a discharge is required under a Contract for Sale with a delayed completion until completion is imminent.

I trust that this answers the enquiry.'

Cheers, Paul

G'day Terry

I'm sure the discharge department would diligently file it away in the appropriate receptacle 

Cheers,  Paul

Hi Scott

We find that the primary goal of our buyers is home ownership and, once they're on their way towards that goal via a purchase with vendor finance, their secondary goal is getting the Title in their name and refinancing into a traditional loan, with a lower interest rate.

NSW has had a pretty abysmal capital gain environment since 2004 (sure, not everywhere), so our clients move towards their secondary goals via the deposit they paid and the gradual equity increase they achieve via their P&I loan with us.  We usually find our clients are able to apply for a 90% LVR loan, from a traditional lender, at around the end of year 3 to the end of year 5.

If our buyers had Interest Only loans with us, they would have to rely on capital gain to help them refinance in the future.  As capital gain has gone 'missing in action' in a lot of areas we stick to only offering P&I loans to our buyers.

Cheers,  Paul

Hi Nik

It's always frustrating when someone answers 'that depends' but that's very much the case here.  It depends on two major factors, i.e. what vendor finance strategy you have used to buy/control the property and what state the property is in (as the on-selling rules vary between States).

If you let us know which vendor finance strategy you're planning to buy/control with and the State you're planning to operate in, we'll be able to get back to you with a better answer.

Cheers, Paul