In a property market where creative financing options are more valuable than ever, the vendor note has re-emerged as a strategic tool for both buyers and sellers. As traditional lending tightens and property values continue to challenge affordability in 2025, vendor notes (sometimes called vendor finance or vendor terms) are offering a flexible alternative. But what exactly is a vendor note, how does it work in Australia, and what are the risks and rewards for both parties?
What Is a Vendor Note?
A vendor note is a financial arrangement where the seller of a property agrees to lend part of the purchase price to the buyer. Instead of the buyer sourcing all funds from a bank or lender, the seller effectively acts as the financier for a portion of the sale—usually documented as a second mortgage or promissory note. This can help buyers bridge funding gaps and sellers secure a deal in a competitive or credit-restricted market.
In Australia, vendor notes are most commonly used in commercial property transactions, business sales, and sometimes in residential sales where buyers may struggle to meet strict bank lending criteria. Key features typically include:
- Principal amount: Often 10–30% of the sale price.
- Interest rate: Negotiated between buyer and seller, often slightly above bank rates.
- Term: Usually 1–5 years, with a balloon payment at the end.
- Security: The note is secured against the property, sitting behind any primary lender.
Why Are Vendor Notes Gaining Traction in 2025?
Several factors in the current Australian market are driving renewed interest in vendor notes:
- Stricter lending standards: APRA’s ongoing macroprudential measures in 2025 have made it tougher for some buyers to qualify for full bank finance, especially self-employed and small business owners.
- Higher interest rates: With the RBA cash rate still above 4%, banks are applying more scrutiny and higher assessment rates.
- Property market fragmentation: In softer regional and commercial markets, sellers are more willing to negotiate on terms to secure a sale.
For example, a Brisbane business owner recently used a vendor note to finance the sale of their small manufacturing company. The buyer could only secure 70% of the purchase price via a major bank, so the seller agreed to carry the remaining 20% as a vendor note, with a three-year term and 7% interest. This allowed the sale to proceed in a tight credit environment.
Benefits and Risks for Buyers and Sellers
For buyers, vendor notes can:
- Reduce the deposit or equity required upfront
- Allow purchase when full finance isn’t available through traditional lenders
- Potentially offer more flexible repayment terms
For sellers, vendor notes can:
- Expand the pool of potential buyers, especially in slower markets
- Potentially secure a higher overall sale price
- Earn additional interest income from the note
However, there are important risks for both sides:
- If the buyer defaults, the seller may need to enforce the note and potentially repossess the property.
- The vendor note is usually subordinated to any bank mortgage, meaning the seller is second in line if things go wrong.
- Legal and tax implications—especially with GST and capital gains—require careful structuring and advice.
Key Considerations for Using Vendor Notes in 2025
Before entering into a vendor note arrangement, both parties should keep in mind:
- Documentation: Always formalise the agreement with a solicitor, covering repayment schedule, security, and default clauses.
- Valuation: Independent valuation of the asset ensures fair terms and protects both sides.
- Regulatory compliance: In 2025, ASIC and APRA continue to scrutinise alternative finance, so all arrangements should comply with the National Credit Code if applicable.
- Exit strategy: The buyer will need a plan to refinance or pay out the vendor note at the end of its term—usually via bank finance or asset sale.
For example, in the current market, some commercial buyers are pairing vendor notes with government-backed SME Recovery Loans to optimise their capital structure and reduce risk exposure.
