In Canada, a Vendor Take Back Mortgage (also known as a VTB Mortgage) is a financing arrangement where the seller provides a loan to the buyer to help the sale go through. The property seller would then take payments from the buyer over the agreed-upon term much like traditional mortgages – except the lender is the seller instead of a bank or other private mortgage lender. In order for a seller to offer a VTB Mortgage, they must fully own the property at the time of the sale (no mortgages on the home).

VTB Mortgages are an excellent option for buyers who have had issues or do not qualify for more traditional mortgage financing products. It can also benefit sellers with additional income streams from their property sale.

Vendor Take Back Mortgages Definition

Vendor Take Back Mortgages make the property seller the buyer’s lender. This is a secondary mortgage option when traditional options can’t be obtained or if the seller wants to add an incentive to help the sale go through. This may not sound like an ideal financing option, but it has its benefits, which we will see below.

With VTB Mortgages, the buyer will make ongoing payments to the seller as with any traditional mortgage loan. The seller sets the interest rate which will be agreed upon with the buyer. Expect the rate to be higher than more traditional mortgages.

What the loan entails varies from situation to situation, and is entirely subject to the seller and buyer’s conversations and requirements. Often, VTB mortgages are used to cover the closing costs and taxes associated with the sale, down payments, or even a portion of the mortgage.

What Are the Benefits?

VTB Mortgages have started to be more readily used due to the rising interest rates and higher stress on buyers when purchasing a property. For buyers, it’s both harder to save for a down payment and qualify for a mortgage. Thus, buyers are open to other financial options to help fund down payments or mortgages. Both sellers and real estate agents can offer Vendor Buy Back Mortgages to prospective buyers to help them buy their dream homes. VTB mortgages also help the seller get the home off the market.

A crucial note, vendor take back mortgages are not ideal for typical home purchase transactions. VTB mortgages are more commonly used in specific situations where the market makes it hard to sell or get traditional loans. Here are the typical situations you may find yourself looking into Vendor Take Mortgage:

• Buyer’s Market: When there are a lot of homes on the market, it can be harder to sell your home. Offering a VTB option can entice buyers who may not be able to afford their homes normally
• Sell the Home: Vendor Take Back mortgages help the seller get their home off the market and the buyer potentially afford a home outside of what a traditional loan offers
• Poor Credit: Help buyers with bad credit financing so they can get the house off their hands and help a buyer get a home 

Here are three key benefits of a VTB mortgage:

1. Sell Faster: There is no middleman processing financing to close the sale, which means the sale can potentially be processed much faster
2. Additional Income: Sellers can gain additional income through regular payments with higher interest rates
3. Reduce Capital Gains Tax: You can defer capital gains from the purchase price with a VTB mortgage

Things to Consider

Sellers

• VTB Mortgages are similar to second mortgages
• The Buyer may not make their regular payments which means the seller is obligated to cover the balance of the sales price
• Use a lawyer to draw up an agreement that protects you from loan default

Buyers

• May have two loans to pay back – such as a typical mortgage and the VTB Mortgage

Property Investors

Vendor Take Back Mortgages are often used mainly for investors and commercial properties, and not so much for home purchases

• Helps defer capital gains tax on the purchase price which leads to tax savings
• Additional income from monthly payments
• Short-term financing solution for buyers/investors
• Can help buyers repair or build up credit

Conclusion

Vendor Take Back Mortgages are unique financing solutions that can benefit the seller and buyer of a property. They help buyers obtain financing they may have had a hard time qualifying for, or help with a down payment, so they can still buy their dream home. They help sellers get their property off the market and get some additional monthly income on the side. If you are considering a Vendor Take Back Mortgage in Ontario, be wary of the risks and considerations.

Working with a mortgage broker can help evaluate your financial situation and mortgage terms before entering into any VTB arrangement to best protect yourself and ensure its the right decision for you.