What is a VTB and how can you benefit from it? By Roberto Sanabria

A Vendor Take Back Mortgage or more commonly referred as VTB, is usually one of the “creative” financing options in a buy-sell Real Estate transaction, where the seller provides the buyer an amount as financing in second position to the main lender to help facilitate the purchase of the property. The take back mortgage usually will have a lien on title on the property until it is discharged. 

It is very important to note that in Canada (unlike the USA), main lenders request that buyer has own stake in the deal, so no 100% financing is allowed.
Usually, VTBs are part of the Purchase and Sell Agreement, and not all lenders will accept them. The lenders that will accept will do with some restrictions, and in all cases, will want to see the buyer come up with more % than the actual % of the VTB, for example: Say Mr. Seller wants to sell his condo in Down Town Toronto to Mr. Buyer for full price of $255,000. Mr. Buyer who has 650 beacon has arranged a mortgage with a B-Type Lender for 70% of the Purchase Price. Mr. Buyer has 20% down payment from own funds but it is short 10%, so the buyer asks Mr. Seller if he would provide a VTB for the remaining 10% ($25,500 with a term of 2Yrs at 8% per yr payable monthly). Mr. Seller accepts the deal and  puts a second charge on the property for $25,500 and will start receiving $170 per month for 24 months, and at the end, Mr. Buyer will pay out the $25,500 by refinancing the property.

What are the benefits of VTB to the Seller?
The most significant is to facilitate the sell of the property for top dollar. The second major benefit is that seller will continue to receive income stream of $X/ month during the term of the VTB, and the interest is around market value for a 2nd mortgage (between 8% and 15%), and that there may be tax benefits to the seller (depending on the circumstances and structure, please consult with your accountant).

What are the benefits of VTB to the Buyer?
Buyer could have lower than average beacon score, be able to acquire and control property with low down payment (not zero down). After the term, the buyer can refinance and payout the seller. During the time of the VTB, buyer can re-establish his credit.

Although VTBs have great advantages for both parties, it should not be entered lightly without having a Mortgage Broker and a Real Estate Lawyer look at the drafted Purchase and Sale agreement that includes the VTB clauses. For example, financing terms, rates, amortization, exit clause, “due on sale” clause, etc..You need to plan ahead for all sorts of situations: if the vendor dies, and their estate (including your mortgage) needs to be 'liquidated'; etc.