We're going to break down a little bit of a vendor take-back mortgage and why people use them.

What is a Vendor Take-Back Mortgage?

A Vendor Take-Back Mortgage is simply when the seller of a property provides some or all of the financing for the buyer. The seller or the property owner essentially becomes the bank and they hold the mortgage for the potential buyer. The owner of the home continues to own a percentage of the property equal to the amount of loan until the vendor take-back mortgage is paid in full.

Interest Rate

One of the big benefits is that the seller can set the interest rate on the mortgage for the buyer. Just like a bank makes money from interest on the principal, so can the seller. They could end up getting a higher interest rate which means more money in their pocket, or they could charge a lower interest rate than a lender to entice a buyer.

If sellers may have a harder time selling their property in markets when interest rates are higher. In this situation the seller might offer a bit of a lower interest rate than most lenders. They can do their payments based on principal and interest, or they could do it interest only payments as well.

Income Property Acquisition

Sometimes a seller, often a real estate investor, wants a certain amount of money for the rental property and the bank just won't approve buyers for that amount because the rent costs don't make sense. This is often because the property's not in the right shape to sell for the listed price, and its appraised value is too low. So, it needs to become profitable, and needs to be fixed up, renovated or updated.

Sometimes if the seller is able, if they own the property free and clear or they don't owe that much on it, they'll do a vendor take-back for a buyer until they can get the rents up. The seller's going to hold the mortgage, renovate the property until it is in great shape, have the property appraised for significantly higher value, and thus justifying a higher rent.

At some point after the new appraisal price comes in, the financial lender will look at the new numbers. If they make sense then they will likely be willing to pay the seller out and the buyer will assume a traditional mortgage with the lender.

Equity + Interest

Leaving a portion of the sale price in the property itself means selling your home from all of the equity you've put into it of the home plus interest, meaning that money is working for you. And as an added bonus, this type of transaction also may shield you from getting taxed excessively on higher priced investment properties.

Breaking into the Housing Market

A vendor take-back mortgage can benefit those who are buying their first home and have limited funds for a down payment. By allowing you to put down a smaller sum of money, this type of mortgage makes it easier for people to enter into housing markets where they might not be able to without assistance from friends or relatives.

Just know that buyers will usually end up paying more in interest to the seller in a vendor take-back situation than the rate a lender would charge.