A Guide to Vendor Take-Back Mortgages in Ontario

In the ever-changing Ontario real estate market, standard deals don't always work. Sometimes, a motivated buyer is just shy of the required down payment for their dream home. Other times, a seller in a slower market struggles to attract offers that meet their asking price. In these situations, a little creativity can be the key to making a deal happen.

One of the most powerful creative financing tools available is the Vendor Take-Back (VTB) mortgage.

A VTB is a unique arrangement where the seller of the property also acts as a lender for the buyer, essentially "taking back" a portion of the purchase price as a short-term loan. It’s a sophisticated strategy that can create a win-win scenario, but it requires careful planning and expert guidance. This guide will explain exactly how VTB mortgages work, the specific situations where they are used, and the crucial pros and cons for both buyers and sellers.

What is a Vendor Take-Back Mortgage?

At its core, a VTB is a form of seller financing. It's a loan provided from the seller to the buyer to help them complete the purchase of the seller's own property.

The Seller Becomes the Bank

Think of it this way: the seller is acting like a small, private bank for a portion of the deal. They provide a loan to the buyer, which the buyer then makes regular mortgage payments on over a pre-agreed term. This loan is secured against the property, just like a traditional mortgage.

How It's Typically Structured

A Vendor Take-Back mortgage is almost always a second mortgage. It sits in second position behind the primary mortgage that the buyer secures from a traditional 'A' lender, like a bank or credit union. The VTB is used to bridge the gap between the buyer's down payment, the bank's loan, and the final purchase price.

Here’s a clear example of a common VTB structure:

Purchase Price: $1,000,000

Buyer's Cash Down Payment: $100,000 (10% of the price)

Primary Mortgage from a Bank: $700,000 (The bank is lending 70% of the home's value)

The Gap: There's a $200,000 shortfall.

VTB Mortgage from the Seller: The seller provides a $200,000 second mortgage to the buyer to cover this gap.

Typical Terms of a VTB

Because a VTB is a private arrangement, all the terms are fully negotiable between the buyer and seller. However, they are typically structured as short-term loans, often for 1 to 3 years. The payments are also frequently "interest-only," meaning the buyer only pays the interest each month, not the principal. The full principal amount is then due as a "balloon payment" at the end of the term. This structure is based on the understanding that the VTB is a temporary bridge, not a permanent solution.

Learn more about home equity loans in Ontario

Check your eligibility in under 60 secs.

See How Much I Qualify For

Why Use a VTB? The Buyer's Perspective

For a buyer, a VTB can be the key that unlocks a property they otherwise couldn't afford.

Bridging a Down Payment Gap

As shown in the example above, this is the most common and powerful use case for a VTB. In today's market, many buyers have a strong, stable income but have not yet saved the full 20% down payment required by many lenders for a conventional mortgage. A VTB from a willing seller can bridge that gap, allowing the buyer to secure the prime 'A' lender mortgage and complete the purchase.

Helping with Qualification

In some specific cases, a VTB can help a buyer qualify for their primary mortgage. By reducing the total loan amount required from the bank, it can help the buyer's debt service ratios (the measure of their debt against their income) fall within the lender's strict limits. It can be a strategic way to make an application look stronger to the primary lender.

For Unique or Hard-to-Finance Properties

Traditional lenders can sometimes be hesitant to finance properties that don't fit their standard "cookie-cutter" mold. This might include unique rural properties with large acreage, buildings with a commercial component, or properties needing significant repairs. A VTB can be part of a creative financing solution that makes the deal possible when a bank won't lend the full amount required.

Why Offer a VTB? The Seller's Perspective

A VTB isn't just a benefit for the buyer. For a savvy seller, it can be a powerful strategic tool.

Making Your Property Stand Out

In a slower "buyer's market," where there are many homes for sale and fewer buyers, offering a VTB can make your property dramatically more attractive. By advertising "Vendor financing available," you open up your home to a wider pool of potential buyers who may not have the full 20% down payment, giving you a significant competitive edge.

Securing Your Full Asking Price

A VTB can be a powerful negotiation tool. If a buyer loves your home but is trying to negotiate the price down because they are short on funds, you can counter by offering a VTB. This allows you to hold firm on your full asking price while still providing a solution that helps the buyer make the deal work.

Earning Passive Interest Income

The seller earns interest on the VTB mortgage, and the rate is typically much higher than what they could get from a GIC or other safe investment. In our example, the seller is earning interest on a $200,000 loan, effectively turning a portion of their home equity into a stable, cash-flowing investment for the next few years.

Deferring Capital Gains Tax

For sellers of an investment property (not a primary residence), a VTB has a significant tax advantage. By spreading out the receipt of the purchase price over several years, the seller can defer a portion of the capital gains tax they would have to pay. This is a sophisticated strategy that should always be discussed with a qualified accountant.

A Broker's Role: Structuring a Safe VTB

While a VTB can be a win-win, it's also a complex transaction with risks for both parties. Working with an experienced mortgage broker is essential to structure the deal safely and professionally.

For the Buyer: Getting Lender Approval

The buyer's primary 'A' lender must know about and approve the VTB as part of the overall financing structure. Attempting to hide a VTB from the primary lender is mortgage fraud. A broker's job is to present the entire deal transparently and find a primary lender who is comfortable with a VTB in second position.

For the Seller: Performing Due Diligence

When a seller offers a VTB, they are taking on the risk that the buyer might not pay them back. A crucial part of our role is to help the seller perform due diligence on the buyer. We can help them review the buyer's credit report, income verification, and overall financial situation to ensure they are a good credit risk who can comfortably afford the payments on both mortgages.

The Importance of a Real Estate Lawyer

It is absolutely critical that both the buyer and the seller are represented by their own experienced real estate lawyers. The lawyer is responsible for drafting the VTB mortgage contract, ensuring all terms are fair and clearly stated, and registering the mortgage charge on the property's title correctly. This legal oversight protects everyone's interests.

Is a Vendor Take-Back Mortgage Right For You?

A Vendor Take-Back mortgage is a creative and flexible tool that can unlock real estate deals that otherwise would not be possible. It's a testament to the fact that in real estate, almost everything is negotiable. However, it is a sophisticated strategy that requires careful planning, transparent communication, and expert guidance from a team of professionals.

Whether you're a buyer who is slightly short on your down payment or a seller looking for a competitive edge, a VTB could be the solution you're looking for.

If you'd like to explore if a creative financing solution like a VTB mortgage is right for your situation, contact our brokerage today. We can provide a confidential consultation to review your goals and structure a deal that works for you.

Get Personalized Advice

with an Award-Winning Mortgage Broker

4.9 from 812 reviews

Schedule My Call