If you have a mortgage, chances are, you know what it means to fall behind on payments. Unfortunately, it can happen to the best of us. With rising interest rates in Canada, some homeowners might wonder what happens if they cannot keep up with their mortgage payments.
In Ontario, lenders can take one of two options when you fail to make your mortgage payment: they can foreclose on your property or initiate power of sale proceedings. Both options result in the loss of your home and negative impacts on your credit rating. However, there are some differences in how these processes work that you should be aware of if you are experiencing financial difficulties.
Lenders have two options when borrowers miss payments
In Ontario, lenders can pursue payment from homeowners who are behind on their mortgage payments one of two ways. The first option is foreclosure on the property, and the second option is power of sale. In both instances, the property occupants are notified of the commencement of either process by a legal notice from their lender, called a Notice of Sale, however the ensuing impacts on the borrowers will vary. A Statement of Claim confirms which process has been chosen by the lender.
The difference between foreclosure and power of sale is the process by which the property is transferred. With foreclosure (also known as judicial foreclosure), the creditor must obtain court approval before they can seize control of your property. With a power of sale (or statutory foreclosure), this transfer happens automatically once certain conditions have been met, for example, if you fail to make payments for 90 days.
What is a power of sale in Ontario?
Power of sale is an alternative process for lenders to collect debt owed by the borrower or mortgagor. In this situation, after the lender has obtained an order for possession from the court, it may appoint a power of sale agent, typically a real estate broker, to sell the house and give the proceeds to the lender.
Power of sale is the most commonly used remedy by lenders in Ontario that takes approximately six months to complete as there is a strict process that must be followed.
Steps for power of sale
The property occupant or borrower defaults on their mortgage.
A default usually occurs when the borrower is unable to pay one or more of their payments. However, a default can be found where the borrower fails to insure the property, pay realty taxes, damages the property, or is using the property for illegal purposes. The lender must notify the borrower of their default in writing so that the borrower has the opportunity to remedy the situation before the lender takes further action.
The lender delivers a Notice of Sale.
After the borrower has defaulted for 15 days, the lender delivers a Notice of Sale Under Mortgage under the Mortgages Act. Additional notices are required under the Bankruptcy and Insolvency Act and the Farm Debt Mediation Act. These notices are delivered to every mortgagor and guarantor listed on the property.
The borrower has time to pay their debt.
After delivery of the Notice of Sale, the lender must wait a period of time, referred to as the redemption period, before taking further action. During this time, the borrower can pay off the mortgage or, at the very least, make payments to bring the mortgage to good standing. If the mortgage is not paid before the expiration of the redemption period, the lender issues a Statement of Claim to collect the debt and take possession of the property.
The lender applies for possession of the property.
If the mortgagor fails to file a Statement of Defence, the lender can sign a default judgment and ask the court to issue a Writ of Possession. Once granted, the Writ of Possession is provided to a sheriff in the region where the property is located. The sheriff then schedules an eviction date with the borrowers granting them a specific time period to move out of the home. If they refuse to move, the sheriff can arrange for their removal.
The lender takes possession of the property.
After the home has been vacated, the lender sells the home in “as is” condition.
The proceeds of the sold property are used to pay off debts.
Often the sale proceedings are initially used to pay the selling costs and pay off any debt. Any surplus funds, if any, are then provided to the borrower.
What happens in a foreclosure in Ontario?
Foreclosure is a legal process where the mortgagee takes a mortgaged property back from the mortgagor when the mortgagor fails to make the mortgage payments. Usually this action is taken after three to six months of missed payments. Although the power of sale is most common in Ontario, foreclosures do still happen. While the power of sale takes roughly six months to complete, a foreclosure can take up to one year.
Similar to the power of sale, the procedure for foreclosure starts with a notice from the lender informing the borrower that they have defaulted on their mortgage obligations. The Statement of Claim will read “foreclosure action” at the top of the document. The process looks a lot like the power of sale up to the issuance of the Writ of Possession.
While power of sale allows the lender to sell the property to pay the debt, in a foreclosure the lender takes title to the property. Taking title allows the lender to do what they wish with the property, including renting or selling it. If the lender chooses to sell, they are not obligated to get the highest price. Further, none of the sale proceeds will be given to the borrower.
Contact the Real Estate Lawyers at Campbells LLP in Oakville to Understand Your Mortgage Obligations
If you believe you may be unable to make a mortgage payment on a property, it is important to understand your obligations and the consequences of missing payments. You may risk losing your home if you fail to make payments over time. It is important to work with a real estate lawyer who can ensure that your interests are represented and you are kept informed in the event of any action.
The experienced lawyers at Campbells LLP in Oakville have been servicing clients in real estate matters since 1999. Our firm has experience addressing all aspects of real estate in both residential and commercial transactions. Our lawyers are thorough, efficient, and focused on delivering the best possible outcome for every single client. Contact us online or at (905) 828-2247 to determine how we can assist you.