What is a Vendor Take Back Mortgage?

A vendor take back mortgage, also known as VTB mortgage, is a type of financing arrangement in Canada that involves the seller of a property lending money to the buyer to help them purchase the property. In a vendor take back mortgage, the seller acts as the lender and accepts payments from the buyer over a specified period, just like a traditional mortgage. However, instead of a bank or other financial institution providing the mortgage, the seller provides the financing, which benefits both parties involved. The property must be owned outright by the seller, meaning there can’t be a mortgage on the home at the time of selling.

A vendor take back mortgage can be an attractive option for buyers who may not qualify for traditional financing or sellers looking for additional income streams from their property sale. It allows them to use alternative means to secure the house they want without using a financial institution as a middleman. Let’s learn more about the vendor take back mortgage and how it benefits buyers, sellers, and property investors.

What is a Vendor Take Back Mortgage?

The vendor take back mortgage enables the property’s seller to become the buyer’s lender. A vendor take back mortgage provides an option when traditional mortgage setups are not an option or when the seller wishes to offer an incentive to a buyer. Although this might not sound like an ideal solution, there are some circumstances when both buyers and sellers might consider taking advantage of the vendor take-back mortgage.

The buyer must still make regular payments to the seller as with any other lender. The interest rate is set by the seller and agreed on by the buyer. However, it is generally at a higher interest rate than one would receive with a more traditional mortgage.

The amount of money provided to the buyer varies from enough to cover closing costs or transfer tax to more substantial amounts to cover the down payment or a portion of the mortgage.

Vendor Take Mortgage Structuring Options

When considering a vendor take-back mortgage, both buyers and sellers have several options for structuring the arrangement:

Secondary Financing

The most common vendor take back mortgage structure is as a second mortgage. In this arrangement, the buyer secures primary financing from a traditional lender, and the seller provides secondary financing to cover the gap between the primary mortgage and the down payment.

This structure works particularly well when buyers can qualify for some conventional financing but not enough to cover the full purchase price minus their down payment. It gives sellers reassurance knowing that a professional lender has vetted the buyer’s creditworthiness for the primary mortgage.

A secondary financing VTB mortgage typically carries a higher interest rate than the first mortgage to compensate the seller for the increased risk of being in second position.

Primary Financing

In some cases, especially with commercial properties or vacant land, the seller may provide all the financing through a VTB mortgage. The buyer makes a down payment, and the seller finances the rest.

This approach is common when traditional lenders are hesitant to finance certain property types or when the buyer faces challenges in qualifying for institutional financing. A primary financing VTB mortgage gives sellers maximum control over the transaction terms but also places all the lending risk on their shoulders.

For sellers comfortable with this arrangement, it can mean selling properties that might otherwise sit on the market for extended periods. For buyers, it might be the only way to purchase properties that banks consider non-standard or too risky.

Many primary financing vendor take back mortgages include security provisions beyond the mortgage itself, such as personal guarantees from buyers or additional collateral beyond the property being purchased.

Partial Financing with Balloon Payment

A VTB mortgage can be structured with lower monthly payments and a larger “balloon payment” due at the end of a specified term (typically 1-5 years). This gives buyers time to arrange alternative financing, improve their credit position, or sell the property.

This structure provides flexibility for buyers while giving sellers some monthly income and the promise of a larger payout in the relatively near future. The arrangement for a vendor take back mortgage is particularly attractive in markets where property values are expected to rise, as the buyer’s equity position will improve over time, making refinancing more feasible.

The balloon payment structure requires careful planning by the buyer to ensure they can meet the large payment obligation when it comes due. Sellers should ensure the terms include clear provisions for what happens if the buyer cannot make the balloon payment.

How Does a Vendor Take Back Mortgage Benefit the Buyer and Seller?

Vendor take back mortgages have made their way back into the residential lending scene due to changes in the market and more stress put on buyers. It’s harder to acquire a mortgage because it’s harder to save for a down payment.

Buyers are looking for different ways to get down payments and access mortgages. Both sellers and real estate agents have learned more about vendor take back mortgages and can present them to buyers as a viable option to help them buy their dream homes. In turn, it also helps sellers get their houses off the market.

The vendor take back mortgage is not the ideal lending situation for the average transaction. Instead, it’s used in specific cases where there are either market challenges for the seller or credit challenges for the buyer.

1. A buyer’s market. High inventory means lots of competition, putting a seller at a disadvantage. To entice buyers to consider their property over the hundreds of other options available, a seller can offer funding to a buyer who might not otherwise have access to the funds required to make an offer.
2. It can get the seller’s home off the market while helping the buyer make a purchase that their finances might not have allowed when going the more traditional route.
3. In the case of poor credit, a buyer interested in the home can benefit if the seller is willing to assist them financially. That is a win-win situation. For the seller, it isn’t about the interest only. They also get the house off their hands while the buyer gets to purchase a home that their current credit would have prevented.

In both scenarios, the seller also benefits from increased cash flow from the interest.

Benefits of a Vendor Take Back Mortgage

The vendor take back mortgage offers three main benefits to the seller:

1. You can sell your home faster. Without a financial institution to go through, the process of selling your home has the potential to go much quicker, which is especially beneficial if you must move within a certain amount of time.
2. You can generate extra income from the interest. Because the interest rate tends to be higher than with a financial institution, you can put extra money in your pocket.
3. You can reduce the amount of taxes on capital gains. A vendor take back mortgage allows you to defer the capital gains from the purchase price, resulting in tax benefits.

For the buyer, the vendor take-back mortgage provides an additional financing option when facing challenges with your down payment or credit history.

Seller Considerations

As good as it sounds, the vendor take back mortgage does come with some warnings to sellers.

1. First, remember that this type of mortgage is like a second one.
2. You could be faced with a buyer unwilling or unable to make their mortgage payments. When this happens, the payments can fall back on you for the balance of the sales price.
3. Working with an experienced lawyer who can draw up an agreement to protect you against loan defaults costs money. That is a must since if the buyer defaults, the loan and your finances are at risk. It is also a costly process to file for foreclosure.

Buyer Considerations

Depending on the vendor’s take-back mortgage setup, you will have two loans to pay back. Often, buyers are tempted by the vendor take back mortgage to help provide the down payment to secure a mortgage from a bank. In the case of a conventional mortgage, you pay the down payment, and the bank pays the balance. You then make mortgage payments for the balance.

In the case of a vendor take-back mortgage, the seller might give you a portion or all of your down payment; you then pay the bank, and they transfer the funds to pay the purchase balance. You now have to begin paying back the seller for the down payment and the bank their mortgage payments.

You have to calculate these monthly payments based on the agreed-upon payment schedule and interest to ensure you can afford the required payment when combined.

Property Investor Considerations

A vendor take-back mortgage is primarily used for investors and commercial properties.

• Sellers who own investment properties outright can face hefty capital gains taxes when selling. A vendor take-back mortgage can help defer capital gains from the purchase price, resulting in impressive tax benefits for the seller.
• Sellers also benefit by generating monthly income from the mortgage payments.

As with the house purchase example, for investors with poor credit, the vendor take back mortgage provides:

• A short-term financing solution until something better comes along from a mortgage lender.
• The buyer can work on building their credit by paying back the vendor.
• Buyers can also build up equity in the property and use that to obtain a better setup with a more appealing mortgage rate.

A vendor take back mortgage is a unique financing arrangement in Canada that can provide advantages for both buyers and sellers. With a vendor take back mortgage, buyers who may not qualify for traditional financing can still purchase a property, and sellers can generate additional income from the sale. However, it is essential to note that vendor take back mortgages also come with risks and considerations. Buyers and sellers should carefully evaluate their financial situations, and the mortgage agreement terms before entering a vendor take back mortgage. Nevertheless, for those who can navigate the potential risks and benefits, a vendor take back mortgage can be a valuable tool in the Canadian real estate market.

Whether you’re a buyer exploring alternative financing options or a seller looking to make your property stand out, a VTB mortgage could be a smart move. Connect with a RE/MAX agent today to learn how this flexible arrangement could help you close the deal with confidence.