- A vendor take-back mortgage is seller financing secured by a mortgage, and it is registered at Land Titles like any other mortgage.
- If a bank holds the first mortgage, a seller's second mortgage generally ranks behind it because of the earlier serial number.
- A lender's enforcement rights are often limited to the land, but there are exceptions for corporate borrowers and insured high-ratio mortgages.
A vendor take-back mortgage, often called a VTB, is when a seller lends the buyer part of the purchase price instead of receiving all of it at closing. The buyer repays the seller over time, and the seller holds a mortgage as security.
It can help a deal close, but it also makes the seller a lender with real risks. This article explains the general rules that apply to a mortgage like this in Alberta. The terms of any VTB are negotiated, so a lawyer should review yours.
This article covers the law of Alberta.
How a VTB works
In a VTB, the buyer still becomes the registered owner, and the seller takes back a mortgage for the amount being financed. The mortgage is the same kind of document used by any lender.
A mortgage is a charge on land created merely for securing a debt or loan. It has effect as security only and does not operate as a transfer of the land, so the borrower stays the registered owner.
The price, interest rate, payment schedule and term are all matters to be agreed in writing between buyer and seller.
How it is registered
The borrower executes the mortgage in the prescribed form, or to the like effect, in order to register it.
Documents are submitted to a Land Titles office on the prescribed form, by mail or drop-off, with fees required at the time of submission. Accepted documents are registered in the ALTA database and given a registration number, and the submitter receives a registration notice.
The mortgage levy is $50 plus $5 for each $5000 or portion thereof of the principal secured. If the Registrar does not accept the mortgage, the levy is returned to the payer.
A seller who has not yet registered a mortgage interest can protect it by registering a caveat, and a levy is also payable on that caveat.
Where the seller ranks
Priority is decided by the serial number the Registrar assigns. Registration order, not signing date, decides who is first and second.
A second mortgage is registered the same way as a first mortgage and carries its own levy. It ranks behind the first because the first has the earlier serial number.
Where the buyer also has a bank mortgage, the bank will often want to be first. A first mortgagee can agree to rank behind a later lender, or the reverse, by filing a postponement in the prescribed form.
For a seller, ranking matters because a lender in a lower position may be paid only after the lender ahead of it.
Risks for sellers and buyers
- Enforcement: in a mortgage enforcement action, the lender's right is generally restricted to the mortgaged land, and a borrower cannot waive this protection. The default redemption period on a foreclosure order is six months for land other than farm land and one year for farm land.
- Exceptions: the land-only protection does not apply to mortgages given by corporations, or to a high-ratio mortgage as defined in the regulations.
- Interest terms: for blended or sinking-fund style payments, no interest is chargeable unless the mortgage states the principal and the yearly or half-yearly rate.
- Arrears: no fine, penalty or higher interest rate may be taken on arrears of principal if it raises the charge above the rate on principal not in arrears.
- Rate cap: a criminal rate is an annual percentage rate above 35 per cent, and charging it is an offence. Interest includes all charges and expenses for advancing credit.
Whether these rules apply to your particular arrangement depends on the facts, so confirm with a lawyer before agreeing.
What to do next
- Ask a lawyer to draft or review the mortgage terms for both sides.
- Confirm the principal sum and interest terms are clearly stated.
- Find out whether a bank mortgage will rank ahead and whether a postponement is needed.
- Check whether the buyer is a corporation, since that changes enforcement rights.
- Plan for the discharge at the end. Once the mortgage is fully paid, the mortgagee must furnish a discharge within 30 days.
Sellers should also consider speaking with an accountant about how the arrangement affects their finances.
Frequently asked questions
Is a VTB registered differently from a bank mortgage?
Generally no. It is executed in the prescribed form and submitted to Land Titles, which registers it and issues a registration number.
Will a seller's VTB rank first?
Not necessarily. Priority follows the serial number assigned on registration, so a second mortgage ranks behind the first. Lenders can also agree to change their order by postponement.
Can a VTB lender sue the buyer personally if payments stop?
Often the lender's right in an enforcement action is restricted to the mortgaged land. That protection does not apply to mortgages given by corporations or to high-ratio mortgages as defined in the regulations.
Is there a limit on the interest a seller can charge?
Yes. Charging interest at an annual percentage rate above 35 per cent is a criminal offence, and interest includes all charges and expenses for advancing credit. Other interest rules also apply to how the rate must be stated.
Sources
- Land Titles Act, RSA 2000, c L-4 (King's Printer) — kings-printer.alberta.ca
- Alberta.ca – Register a land title document or plan — alberta.ca
- Law of Property Act, RSA 2000, c L-7 (King's Printer) — kings-printer.alberta.ca
- Interest Act, RSC 1985, c I-15 — Justice Laws (federal)
- Criminal Code, RSC 1985, c C-46, s. 347 — Justice Laws (federal)
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
This is a real estate question
A home purchase with us is from $1,242.95, tax included. Third-party fees are extra.