But is this strategy allowed in Canada? The short answer: Yes—but with conditions.

This question often comes up in real-world scenarios. For example, we recently assisted a real estate agent and her client who wanted to propose a VTB to the seller. However, the client’s mortgage was high-ratio and insured—making a VTB ineligible under insurer guidelines.

So what exactly is a vendor take-back mortgage, and when can it be used? Here’s a quick breakdown of how VTBs work and when they’re allowed.

What is a vendor take-back mortgage?

A VTB mortgage involves the seller financing part of the home purchase by lending money directly to the buyer. The buyer still obtains a primary mortgage from a lender, but the seller’s loan is registered in second position behind the main mortgage.

This can be helpful in situations where the buyer is short on funds for a down payment or doesn’t qualify for a large enough first mortgage.

When is a VTB allowed?

While VTBs are legal and sometimes used in creative financing arrangements, they must be approved by the primary lender—especially if the VTB is in second position.

Most A-lenders (like big banks and credit unions) are very conservative and rarely allow secondary financing unless the borrower has a very strong profile and the total loan-to-value (LTV) remains within acceptable limits.

In contrast, alternative lenders and private lenders are often more open to such arrangements, particularly when the combined LTV remains under 80% and the buyer demonstrates solid repayment capacity.

Key considerations of a VTB

• Lender approval required: You must disclose the VTB to the first mortgage lender and receive their written consent.
• Insured mortgages excluded: If your mortgage is insured through CMHC, Sagen, or Canada Guaranty, a VTB is not allowed. The entire down payment must come from your own resources (or an acceptable gift).
• Legal documentation: The VTB must be documented properly, with terms clearly laid out and a second mortgage registered on title.
• No hidden financing: Misrepresenting or hiding the existence of a VTB from the first lender constitutes mortgage fraud.

When does a VTB make sense?

A VTB can be a creative solution for buyers in non-traditional situations—such as those purchasing unique properties, dealing with short-term credit issues, or arranging financing through private channels.

However, it’s not a go-to option for typical residential purchases with insured or high-ratio mortgages.

Case study: A successful vendor take-back deal in the GTA

Property: Legal duplex
Sale Price: $800,000
Buyer: A real estate investor with strong equity but limited verifiable income
Seller: Retiring landlord, mortgage-free, willing to help facilitate the sale

Deal Structure:

• Down payment by buyer: $200,000 (25%)
• First mortgage from institutional lender: $480,000 (60%)
  • Traditional lender was willing to finance due to the rental income from both units
• Vendor take-back mortgage: $120,000 (15%)
  • 2nd position, interest-only at 7% for 2 years, balloon payment at end
  • Registered on title, fully documented

Why it worked:

• The seller had no mortgage and didn’t need all the funds immediately.
• They were more interested in earning interest income on a portion of the sale proceeds.
• The buyer didn’t qualify for the full mortgage amount due to self-employed income but had a solid down payment and strong credit.
• The VTB helped bridge the financing gap and allowed the transaction to close quickly and smoothly.

Outcome:

• The buyer refinanced 18 months later, paid off the VTB, and kept the property as a cash-flowing asset.
• The seller earned $8,400 per year in interest on the $120,000 loan, a better return than they were getting elsewhere.

Key takeaways:

• VTBs can be a win-win, especially in a buyer’s market or when sellers want to defer capital gains or earn ongoing interest income.
• They are especially useful in cases involving self-employed buyers, unconventional properties, or inter-generational wealth transfers.
• Legal advice, proper documentation, and clear terms are essential to protect both parties.

Final thoughts

A vendor take-back mortgage in second position can be used in Canada—but only with full disclosure, proper legal documentation, and approval from the primary lender.

While it’s not a common option for most buyers, a VTB can be a powerful tool in the right circumstances—especially when guided by an experienced mortgage broker and lawyer.

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Last modified: March 25, 2025