What is a vendor take-back mortgage in Ontario and are there risks?

A vendor take-back mortgage (VTB) is an arrangement where the seller of a property loans a portion of the purchase price to the buyer instead of requiring full cash at closing. The seller effectively acts as a lender, and the amount is registered as a mortgage charge against the property — typically in second position behind the buyer's institutional first mortgage.

VTBs can help buyers who need extra financing to close a deal, especially in situations where a slightly larger down payment or bridge amount is needed. For sellers, a VTB can make a property easier to sell, provide a monthly income stream, and potentially offer tax advantages by spreading capital gains across the years the mortgage is repaid. The interest rate on a VTB is negotiated between the buyer and seller.

The risks for sellers are significant: if the buyer defaults, you become a lender and must pursue the property through legal proceedings to recover your money. As a second-position lender, you are behind the bank and may not recover fully if the property value has dropped. Buyers must disclose VTB arrangements to their primary lender, as some lenders prohibit them or factor them into qualification. Both parties need independent legal advice before signing a VTB agreement.