Vendor take back mortgages (VTB) are a creative solution for bridging the gap between buyers and sellers in the real estate market. This unique financing arrangement has recently gained popularity due to its flexible approach to property transactions. 

This article explores vendor take back mortgages, highlighting their advantages and disadvantages. Whether you are a first-time homebuyer (FTHB) or an experienced property investor, having a thorough understanding of VTB mortgages can open new avenues for financing your next property.

Key Takeaways

• VTB mortgages provide options for buyers but carry higher interest rates and risk of default. 
• A vendor take back mortgage can have legal and financial implications. 
• These mortgages have the potential to generate capital gains and interest income.

What Is a Vendor Take Back (VTB) Mortgage?

A vendor take back (VTB) mortgage is a type of financial arrangement in which the seller acts as the lender. This allows the seller to provide financing to the buyer instead of through traditional borrowing sources like banks and other lenders. 

This type of mortgage involves the buyer entering into a purchase and finance agreement with the seller when purchasing the property. The seller registers a mortgage against the property and transfers the title to the buyer but still holds a claim through a lien on the property until the mortgage is repaid. 

The buyer will make mortgage payments to the seller (acting as a lender) rather than a traditional lender like a bank or financial institution. VTB mortgages could include closing costs, the downpayment, or the home’s purchase price. 

These mortgages are typically used to bridge the gap between what a buyer is approved for through traditional lenders and the property’s total purchase price. Since a lien is placed on the home, obtaining a VTB in addition to a traditional mortgage will depend on the lender and whether your mortgage is a standard or collateral charge.  

Main Features of a VTB Mortgage

Equity: The seller maintains equity in the home, owning a percentage equal to the amount of the loan until the mortgage is repaid. 

Interest Rates: For the transaction to take place, the seller and buyer must agree on an interest rate. Since it’s considered a private mortgage, this rate could be higher than those currently available in the market. 

Collateral: Like traditional mortgages, the property acts as collateral for the loan. If the buyer defaults on payments, the seller has the right to take possession of the property.

Income: Sellers can generate additional income through a VTB from the interest on the loan without selling their capital asset (the subject property). 

Advantages of a VTB Mortgage

VTB mortgages provide distinct benefits to buyers and sellers. This financing arrangement can assist in completing property transactions that may have otherwise posed difficulties.

Buyers

For buyers, VTB mortgages provide an additional financing option for those who struggle to save enough for a downpayment or have credit issues. This agreement can benefit newcomers with a limited Canadian credit history or first-time homebuyers struggling to save for their downpayment. These mortgages can be helpful as you work toward qualifying for a traditional mortgage.  

If the property’s appraised value is lower than the purchase price, a vendor take back mortgage can act as a bridge loan to close the gap between the purchase price and the property’s assessed value. Traditional lenders will base your mortgage amount on the lower of the purchase price or appraised value, which could leave you on the hook to make up the difference. 

Sellers

For sellers, VTB mortgages can help you sell your home faster, eliminating the need for buyers to go through the mortgage application process and qualify for a mortgage. Having a vendor take back a mortgage can also help you spread out the capital gains taxes you would pay on the sale of your home if it’s not your primary residence. Since you receive the proceeds from the sale as mortgage payments, this can reduce your capital gains while generating interest income. 

Disadvantages of a VTB Mortgage

While a VTB mortgage may sound like the perfect solution, there are some risks to be aware of. 

Buyers

For buyers, these mortgages typically have higher interest rates than traditional mortgages, which can significantly increase the overall cost of borrowing. Additionally, depending on how the VTB mortgage is structured, you may pay compound interest, which is added to the principal annually. This can make your repayments much higher. 

If you have a traditional mortgage and a VTB mortgage, you will be responsible for two mortgage payments, which could pose financial challenges if you haven’t adequately budgeted or prepared to manage both expenses. Financing options may also limit you as not all traditional lenders are familiar with VTB mortgages. 

Sellers

For sellers, if your buyer fails to make payments, you may be required to take over the financial burden of the outstanding balance. If you cannot manage payments on top of other obligations like another mortgage, you could be at risk of default. If in default for more than 180 days, the foreclosure process would begin, which could be costly. 

Additionally, VTB mortgages are often in second position to traditional mortgages. So, if the buyer defaults on their payment obligations, the first mortgage lender will have the right to settle first, and you may be unable to recover your money. 

Legal and Financial Considerations

It’s advisable to get expert legal advice before proceeding with a vendor take back mortgage as either a buyer or seller. These mortgages require a carefully drafted agreement that protects both parties, which could lead to higher legal costs. 

Since a VTB mortgage is not financed through a federally regulated financial institution (FRFI), buyers can bypass mortgage stress testing, which could make these mortgages riskier. If the buyer defaults, both buyer and seller could be at risk of foreclosure. For sellers with a traditional collateral charge mortgage on the property, lenders could recall the mortgage if they become aware of the home’s sale. 

If the seller doesn’t want to hold a VTB mortgage for as long as a traditional mortgage amortization, the buyer may be forced to qualify for the remaining balance much sooner than expected. 

These mortgages, or a combination with traditional mortgages, can only be renewed with another lender if you are refinancing and combining them into one. VTB mortgages are technically private mortgages, and having a second mortgage may not be allowed with some lenders and may require a postponement at renewal. 

Alternative Solutions to VTB Mortgages

Since vendor take back mortgages may not be for everyone, alternative options exist. For many buyers, traditional mortgages are still the most popular financing option. These mortgages are offered by banks and other financial institutions with fixed or variable rates much lower than a VTB mortgage. 

If you can’t qualify through a traditional lender, subprime or private mortgage lenders offer an alternative to VTB mortgages. Private lending provides the most flexibility, allowing you to have a mortgage agreement that meets your needs. However, these mortgages often come with higher interest rates and are typically meant to be short-term solutions while you work toward qualifying for a traditional mortgage. 

Frequently Asked Questions

Final Thoughts 

Vendor take back (VTB) mortgages provide an alternative approach to financing a home that can fill the gap that traditional lending cannot. These agreements allow potential homeowners to enter the housing market sooner while providing sellers with the advantage of quicker sales and income generation. 

It’s essential to compare the cost of increased interest rates, the possibility of default, and the need for carefully drafted legal documentation against the benefits this type of mortgage provides. If you’re exploring alternative financing solutions, our team of mortgage professionals can help you determine the mortgage solution that’s right for you.