Vendor take back mortgages
The seller carries part of the price. Useful, common, and entirely dependent on what your first lender agrees to.
The short answer
A vendor take back is the seller lending you part of the purchase price, almost always sitting behind the main mortgage. It exists to bridge an equity gap, and it does not exist at all unless the first lender agrees to it.
- It sits in second position, postponed to the first mortgage.
- The first lender has to consent, and registering one without consent is normally a default under your first mortgage.
- Most lenders will not treat a vendor take back as your down payment, because they want to see your own money in the deal.
- It is debt, not a discount, so it raises both your leverage and your total cost.
Why a seller would agree to this
The first reason is simple. It closes a deal that would otherwise stall on financing. A buyer who is short of the equity the lender requires either walks or asks the seller to carry the difference, and a seller who wants the sale done often prefers carrying part of the price to going back to market.
The second reason is price. A vendor take back can support a number the buyer could not otherwise reach, because the buyer is no longer limited to what the first lender plus their own cash will fund. Sellers should understand that the price they achieved is partly a receivable rather than cash at closing.
The third reason is tax timing. Under the Canada Revenue Agency capital gains reserve, a seller who is paid over time can generally claim a reserve for a maximum of four years, so the gain is brought into income over five years. Whether that applies to a particular sale, and how it is calculated, is a question for the seller's accountant and not for a mortgage broker.
What the first lender will want
Three things, in order. Consent before anything is registered on title. A postponement so the vendor charge sits behind theirs in priority. And often a standstill, meaning the vendor cannot enforce its charge without the first lender's agreement, so a dispute between you and the seller cannot put the building into a sale process the first lender did not choose.
The point borrowers miss is that the terms of the vendor charge affect whether the first lender will approve the file at all. A short maturity, heavy monthly payments or wide default remedies all make the senior loan riskier, and the senior lender prices and sizes accordingly. That is why a vendor take back gets negotiated alongside the financing rather than after it. Bring it to us with the offer, not after the commitment is signed.
What to actually negotiate in the vendor charge
Start with the term and the maturity date. A vendor take back maturing before your first mortgage is a problem you have handed to your future self: you owe a balloon payment at a moment when refinancing the whole building may not be available or may not be cheap. Line the maturity up with, or beyond, your first mortgage wherever the seller will allow it.
Then the payment structure. Interest only keeps the cash flow burden low while you stabilize the property. An amortising vendor charge repays faster and costs more each month, and both figures go into the coverage calculation the first lender runs.
Then default. What counts as one, what notice you get, and what the vendor can do about it. Finally, prepayment. If you cannot pay the vendor out without a penalty when you refinance, the vendor charge quietly controls your refinancing date. Ask for a clean right to prepay, in full or in part, without a charge.
The vendor charge is a legal document with consequences beyond financing. Have your lawyer draft or review it.
When a vendor take back is the wrong tool
If the deal only works because the seller is carrying part of it, the price may be the real issue. A building that cannot be financed on ordinary terms at the agreed number is often a building that is not worth the agreed number, and stacking debt on top of the gap does not change the economics, it just moves who is exposed to them.
The same logic applies when the appraisal lands under the contract. Read what to do when the appraisal comes in low before treating a vendor take back as the fix. And if the shortfall is simply equity, the options for bridging it, by asset type, are set out on the commercial mortgage down payment page.
Vendor take back questions.
Seller offering to carry part of the price?
Send the offer and the numbers before you sign. We will tell you whether a first lender will consent and what the vendor charge needs to say.