Blog > The Vendor Take-Back (VTB) Mortgage: A Win-Win in a Higher-Rate Market
How does a vendor take back mortgage work when selling a home in Markham
In a vendor take-back (VTB) mortgage, the seller lends part of the purchase price to the buyer and registers a mortgage (a charge) on the property, usually behind the buyer’s bank mortgage. The buyer closes with less cash or a smaller bank loan, and the seller receives monthly interest and is repaid over an agreed term. In a balanced market, where the mortgage stress test limits what many buyers can borrow, a VTB can widen the buyer pool and help a seller hold firmer on price. The trade-offs are default risk, money tied up for the term, and tax: interest is fully taxable, although a gain on an investment property may be spread out using the capital gains reserve.
How a Vendor Take-Back Mortgage Works
With a VTB, the seller acts as a lender for part of the price. On closing, the buyer’s lawyer pays the seller the down payment and any bank mortgage funds, and the seller’s loan is registered on title as a charge. The buyer then makes payments to the seller under terms agreed in the Agreement of Purchase and Sale, such as the interest rate, payment schedule, term and what happens if the home is sold.
Michael John Lau, a REALTOR® with the Kaizen Real Estate Team, one of the most active real estate teams in Markham and York Region, raises VTBs as one option with sellers who own their home outright or have significant equity, and who are comfortable receiving part of their proceeds over time.
Markham figures are from TRREB’s September 2026 Market Watch. The stress test figure is the federal minimum qualifying rate for uninsured mortgages, or the contract rate plus 2%, whichever is higher.
Why VTBs Come Up in Today’s Market
Markham sat in balanced territory in September 2026, with 4.1 months of inventory on TRREB’s trend measure and homes selling for about 98% of list price on average. Many buyers are qualified but stretched, because lenders test borrowers at a higher qualifying rate than the rate they actually pay. A buyer who is $100,000 short of their target price may be able to close if the seller carries that amount.
For the seller, the benefit is not only a wider pool of buyers. A VTB can be a reason to accept a stronger price or better terms, and the interest income can be attractive compared with other fixed-income options. It is not right for every seller, and the decision should be made with a lawyer and an accountant.
First Charge vs. Second Charge
| VTB as a first charge | VTB as a second charge | |
|---|---|---|
| When it happens | The buyer has no bank mortgage, or the seller finances the main loan | The buyer’s bank holds the first mortgage |
| Priority if the buyer defaults | Seller is paid first from a sale | Bank is paid first, seller is paid from what remains |
| Typical size | Larger share of the price | Smaller top-up, often to bridge a gap |
| Risk to the seller | Lower | Higher |
| Interest rate | Often close to market rates | Often higher to reflect the risk |
Most bank lenders must approve any second mortgage behind theirs, and buyers using a high-ratio (insured) mortgage generally cannot borrow their down payment. Confirm the buyer’s lender allows the VTB before you agree to it.
Considering a VTB to help your home sell? Call Michael John Lau, REALTOR®, at (416) 700-0286 to talk through whether it fits your plan.
A Simple Example
Here is an illustration. A seller agrees to sell a Markham home for $1,400,000. The buyer has $280,000 (20%) for the down payment, but the bank approves only $1,000,000.
| Source of funds | Amount |
|---|---|
| Buyer’s down payment | $280,000 |
| Bank first mortgage | $1,000,000 |
| Seller VTB second mortgage | $120,000 |
| Purchase price | $1,400,000 |
If the VTB is interest-only at 6% for three years, the seller receives $7,200 a year, or $600 a month, and the $120,000 is repaid at the end of the term or when the home is sold or refinanced. The rate and term here are examples only.
How the Seller Is Taxed
Interest income from a VTB is taxable as ordinary income in the year it is received or receivable, at your marginal tax rate.
Capital gains depend on what you sell. If the home was your principal residence for every year you owned it, the gain is generally exempt, so there is little to defer. If it is an investment property, the gain is taxable, and the Income Tax Act allows a capital gains reserve when part of the price is paid in later years. The reserve can spread the gain over a maximum of five years, with at least 20% of the gain included each year on a cumulative basis. The capital gains inclusion rate is 50%, after the federal government cancelled the proposed increase in 2025.
Spreading a large gain can keep more of it in lower tax brackets. Your accountant can confirm whether the reserve makes sense for you.
Protecting Yourself Against Default
- Review the buyer: ask for a credit report, income documents and the bank’s approval terms.
- Keep the total borrowing reasonable: the lower the combined loans compared with the value, the more cushion you have.
- Use a lawyer to draft and register the charge, with clear terms on payments, prepayment, default and sale of the property.
- Require property insurance naming you as a mortgagee, and proof it stays in force.
- Include a due-on-sale clause so the VTB is repaid if the home is sold or refinanced.
- Set up pre-authorized payments and track them monthly.
- Know your remedies: in Ontario, a mortgagee can usually enforce by power of sale after a default, but a second mortgagee ranks behind the bank.
A Note on Licensing and Advertising
Ontario’s Mortgage Brokerages, Lenders and Administrators Act regulates people who carry on the business of lending on mortgages. A seller offering a one-time VTB on their own home is generally not considered to be in that business, but legal commentators have warned that advertising VTBs can raise questions. Ask your lawyer before you mention a VTB in the listing.
Ultimately, the decision is yours. The goal is to make sure you have all the information before you decide.
Next Steps
- Request a free home evaluation: see what your home could sell for today.
- Selling your Markham home: how Michael prepares, markets and negotiates.
- What it costs to sell in Markham: budget for every closing cost.
Frequently Asked Questions
What is a vendor take-back mortgage?
It is a loan from the seller to the buyer for part of the purchase price, registered as a charge on the property. The buyer repays the seller with interest over an agreed term.
Is a VTB usually a first or second mortgage?
Most VTBs are second mortgages behind the buyer’s bank loan. A VTB can be a first mortgage when there is no bank lender, which gives the seller stronger security.
How is VTB interest taxed?
Interest from a VTB is ordinary income, taxed at your marginal rate in the year it is received or receivable. Ask your accountant how it fits your overall tax picture.
Can a VTB reduce capital gains tax?
For a property that is not your principal residence, the capital gains reserve can spread the gain over up to five years when part of the price is paid later. It defers tax rather than removing it.
What happens if the buyer stops paying?
The seller can enforce the mortgage, usually by power of sale, but a second mortgagee ranks behind the bank. Careful buyer review and clear charge terms reduce the risk.
Does the buyer’s bank have to approve a VTB?
Usually, yes. Many lenders restrict or must approve secondary financing, and buyers with insured mortgages generally cannot borrow their down payment. Confirm before agreeing.
Work With Michael John Lau in Markham
Michael John Lau helps Markham sellers weigh every path to a successful sale, including creative options like a vendor take-back mortgage. That means explaining how a VTB affects your price, your timeline and your risk, and working alongside your lawyer and accountant. The goal is a sale that fits your plan for the next chapter.
📞 Contact Michael John Lau, REALTOR®
🌐 www.callmikelau.com
Is a VTB right for your sale?
Michael John Lau can walk you through the pros, the risks and how to structure the conversation with buyers.
Michael John Lau, REALTOR® · Markham, Ontario · (416) 700-0286
Disclaimer. Michael John Lau is a licensed REALTOR® serving buyers and sellers in Markham, Ontario and the Greater Toronto Area. Markham figures are from TRREB’s September 2026 Market Watch (October 6, 2026). Tax information reflects federal rules as of October 7, 2026, including the capital gains reserve and the 50% inclusion rate. The example is for illustration only. Michael John Lau is not a lawyer, accountant, tax advisor or mortgage professional. This article is general information, not legal, tax or financial advice. Speak with a qualified professional about your own situation.