Vendor Take Back Mortgages

Vendor Take Back Mortgages are more common for commercial, land or investment property real estate transactions.  A Vendor Take Back Mortgage is a private mortgage not funded by a financial institution, but rather by the seller or vendor of the property.  In many cases, Vendor Take Back Mortgages are considered when a potential buyer of a property cannot finance the property purchase, perhaps does not have a sufficient down payment, and may not qualify for a conventional first mortgage.

Sellers, in many cases, with Vendor Take Back Mortgages have the ability to defer some taxable capital gain payments.  Vendor Take Back Mortgages should be considered sophisticated financial transactions, which may have tax implications for the seller.  It is important to receive proper financial and tax advice from accredited tax professionals. 

For the seller, there are also some disadvantages to entering into a vendor take back transaction with a buyer.  In essence, the seller of the property would be entering into a legal agreement with another party, who is not actually guaranteed to make payments.   However, depending on the terms and structure of the vendor take back agreement, in the event of a default on the loan, the title on the property would be given to the seller.  Sellers considering offering Vendor Take Back Mortgages should talk to experienced real estate and mortgage lawyers for advice.  These agreements should be drafted properly by experienced lawyers. 

Advantages to sellers of a property offering a Vendor Take Back Mortgage

  • Distressed and hard to sell properties become more desirable
  • Interest rate charged on the mortgage can be higher than the interest rate market
  • A Vendor Take Back Mortgage can provide cash flow on a steady basis to the seller
  • Potential tax savings and tax deferral are possible in some cases with capital gains

Advantages to buyers of a property with a Vendor Take Back Mortgage

  • Financing becomes available even if funds are not obtainable from banks
  • In some cases, the interest rate charges are actually less than market interest rates
  • The buyer is able to close on a purchase which would not have happened otherwise
  • The Vendor Take Back Mortgage will not appear on one’s credit score

Although, there are many advantages to both buyers and sellers, there are definitely disadvantages as well.  Both buyers and sellers of property and those considering Vendor Take Back Mortgages should seek professional unbiased financial, taxation and legal advice.

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April 27, 2017

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