A vendor take-back mortgage is a financing arrangement where the seller lends the buyer a portion of the purchase price instead of requiring the full amount from a bank or other institutional lender. The loan is secured against the property just like a conventional mortgage, and it is registered on the property's title at closing.
In most cases, a vendor take-back mortgage (often called a VTB) sits in second position behind the buyer's primary mortgage from a bank or credit union. The buyer obtains conventional financing for the majority of the purchase price, puts down a cash deposit, and the seller finances the remaining gap. The terms of the VTB, including the interest rate, repayment schedule, and term length, are fully negotiable between the two parties. VTB terms typically range from one to five years, and payments are often structured as interest-only with a balloon payment due at the end of the term.
VTB mortgages have seen renewed popularity in Ontario's real estate market. Tighter bank lending criteria and the federal mortgage stress test have made it harder for some buyers to qualify for the full amount they need, particularly in Toronto's higher-priced market. For sellers, offering a VTB can attract a wider pool of buyers, potentially preserve the asking price, and generate interest income on the financed amount. Sellers may also be able to defer a portion of their capital gain over the term of the VTB by claiming a capital gains reserve under the Income Tax Act.
The arrangement carries meaningful risk for both sides. The seller does not receive the full sale proceeds at closing and faces the possibility of buyer default. If the buyer stops making payments, the seller's remedy is typically to pursue power of sale proceedings, which is the standard enforcement mechanism in Ontario. The buyer, meanwhile, takes on the obligation of two separate mortgage payments and must have a clear plan to refinance or pay off the VTB when it matures.
Both parties should retain independent legal representation. The VTB must be documented with a formal mortgage instrument and registered on title through Ontario's electronic land registry system. The terms should also be set out clearly in the Agreement of Purchase and Sale, and if a first mortgage lender is involved, that lender's consent to the second charge may be required. Land transfer tax in Ontario applies to the full purchase price regardless of whether a VTB is part of the deal.
Related reading: What Is the Mortgage Stress Test in Canada?, Do You Pay Capital Gains Tax When You Sell Your Home in Ontario?, and What Is Mortgage Default Insurance and When Do You Need It in Ontario?.