Vendor Take Back (VTB) Mortgage

You may not have enough money to pay the difference between the asking price of the home and the mortgage you want to assume. When the person selling you the home finances the equivalent of a second mortgage to help you make the purchase, it’s called a Vendor Take Back Mortgage.

Reasons VTB Mortgages Are Attractive

For home owners who have equity in their homes and don’t need the full proceeds of the sale to finance the purchase of another home, offering a VTB is a way to earn higher interest on their investment as compared to putting the money in the bank or in the stock market. Even though offering a VTB mortgage places the seller in second position if the buyer defaults on his or her obligations, there is potential for significantly better earnings on the transaction.

Factors That Sellers and Buyers Must Consider

Unfortunately, some buyers use VTB mortgage arrangements to avoid CMHC insurance costs. They secure a first mortgage on 80% of the sales price of the home, and use the VTB financing to make it appear that they have met the 20% down payment requirement. This is a very dangerous situation for the person providing the VTB mortgage.

For one, most lenders don’t allow second mortgages that bring the total mortgage against property value above 80% as this places the borrower at a higher risk for default on both loans. If the first mortgage exceeds 80%, that lender requires CMHC insurance to protect the investment.

Another reason a seller should never finance a second mortgage that exceeds the 80% valuation on the property is that a buyer who cannot qualify for 90 to 95% financing through regular channels is a very high risk. Unless the vendor take back mortgage is financed entirely by the seller, and the seller assumes the property, it’s not a wise decision to finance a buyer who doesn’t meet a typical lender’s requirements.

Sellers are allowed by B.C. law to include three critical clauses in their VTB agreements.

1. A “due on sale” clause that ensures that the seller is repaid in full if the buyer sells the property.
2. A clause giving the seller rights to cure any defaults under a prior mortgage in order to increase the principle secured by the VTB.
3. A “prior mortgage” clause that allows the seller to initiate foreclosure if the buyer fails to make payments.

A buyer should expect these clauses and understand what they mean. A mortgage broker can help to clear up any confusion.

Benefits of Vendor Take Back Mortgages

Often, the seller is willing to charge lower interest rates (though not always).

Sellers can use vendor take back mortgages to defer some of their capital gains taxes. Instead of paying capital gains on the entire amount received in one year, the seller can divide the gain over five years.

VTBs usually aren’t reported to credit reporting agencies.