When you take out a mortgage to finance a home purchase, you’re making a promise to your lender that you’ll make regular payments until the full loan amount is repaid. But what happens if you fail to make those payments?
Unfortunately, multiple missed mortgage payments can result in foreclosure, which would force you out of your home. Let’s learn more about foreclosures in Canada and how to avoid them.
Key Points
- Lenders start the foreclosure process in Canada after homeowners miss a string of mortgage payments.
- Foreclosures are more common in BC, Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia, and the territories.
- If you haven’t yet missed a mortgage payment but are at risk of doing so, you may be able to avoid foreclosure by speaking with your lender or selling your home.
What Is A Foreclosure In Canada?
When you take out a mortgage on your home, your lender will put a lien on the title, which entitles them to repossess the property if you are unable to repay the loan you took out to finance it.
If you fail to make your mortgage payments, the bank with which you took out your mortgage can take back the property against your will. This is known as a foreclosure.
| Foreclosure On Homes vs. Power Of Sale: What’s The Difference? The primary difference between a Power of Sale and foreclosure is that the former does not require the use of the court system. That’s why the process is much faster and can even result in a completed process within a few short weeks. On the other hand, foreclosure can be a painfully long process that often doesn’t see any sign of resolution until months later, sometimes as long as a year. |
How Many Missed Mortgage Payments Before Foreclosure In Canada?
Being late or missing one mortgage payment won’t trigger a foreclosure. Generally speaking, you’d need to miss a few payments before the lender would start one. Moreover, foreclosure is an expensive process for both the lender and borrower, so most lenders will reach out to you to find a different solution before foreclosure.
Similarly, most lenders will not start a foreclosure process until you’ve broken the mortgage contract and failed to connect with the bank to make alternative payment arrangements.
What Should You Do If You Missed a Mortgage Payment?
As a homeowner, your best course of action is to contact your lender immediately after missing even one mortgage payment to explain the reason for the missed payment. Your lender will be more willing to work with you to rectify the situation that way. They may help you get your payment schedule back on track, rather than going through the foreclosure process.
Suppose the missed payments are simply the result of temporary financial problems. In that case, you might be able to avoid foreclosure and ask for specific concessions to be made on your mortgage payment schedule.
Learn more: How Many Missed Mortgage Payments Before Foreclosure In Canada?
How Does The Mortgage Foreclosure Process In Canada Work?
Foreclosures differ by province and territory. Generally, foreclosures are more common in the provinces of British Columbia, Alberta, Manitoba, Saskatchewan, Quebec, and Nova Scotia. This is what you can expect if your lender starts the process of foreclosure:
A foreclosure starts when the lender files a statement of claim to the court, which you will be served a copy of. You have 20 days to respond to the statement.
- If you reply: If you submit a statement in response, the court may allow you some time to rectify your situation and bring your mortgage back to good standing to avoid foreclosure.
- If you do not reply: If you don’t reply, you’ll default your position, giving the court the power to take your home. Your lender applies with the court to get back their money.
Redemption Order
At this point, the court will likely issue a Redemption Order, which gives you a certain amount of time to bring your mortgage up to snuff or pay it off completely. If you can come up with enough money, you can effectively stop the foreclosure process at this point.
- Order Of Foreclosure – However, if the court has reason to believe that you don’t have the funds, it can go straight to issuing an Order for Foreclosure without a Redemption Order. Here, the property will be transferred to the lender directly.
- Order Of Sale – The court may also decide on an Order of Sale instead, which involves a sale of the home under the court’s control. You’ll then have a maximum of 30 days to vacate the home after the lender (or a new buyer) has possession.
If you ever find yourself in this situation, it’s always best to speak with your lender before the process of foreclosure begins.
What Is A Power Of Sale?
In Ontario, PEI, New Brunswick, and Newfoundland and Labrador, a power of sale is the more common and preferred process over foreclosure, and it requires less legal involvement. A power of sale allows you to possibly keep your home, though it will cost you.
Power Of Sale Process
Each province has its own specific power of sale process. In Ontario, for instance, if your mortgage payments are in default for more than 15 days, the bank can send you a notice of sale, which is the first step towards power of sale.
At this point, you may still be able to negotiate with your lender to pay back what you owe in arrears before the power of sale process begins. But if the process has already legally started, this may not be an available option.
Redemption Period
That said, before the power of sale can start, the lender must serve you with notice and allow for a redemption for a certain amount of time. In Ontario, this redemption period is 35 days, though that number will differ from province to province.
As such, you will have 35 days to pay your outstanding mortgage payments in full and bring your loan back to good standing with the bank. By law, the lender cannot legally continue with any further action against you until the expiration of the notice of sale.
If you bring your mortgage back up to good standing, you may be served with a statement of claim for the debt you still owe after the 35 days have passed. You’ll also be served with notice of possession of your home. You have 20 days to file a statement of defence response.
The Repossession
If the court decides in the lender’s favour, the eviction process can start. You’ll then need to vacate your home, and the lender can auction it off to recoup the funds to pay off the remaining debt.
If the home is sold for more than what you still owe on your mortgage, you’ll receive the balance. But if the home sells for less than what you still owe, the lender may sue you for the difference.
How Does Foreclosure Differ From A Power Of Sale?
The main difference between a foreclosure and a power of sale comes down to ownership. In a foreclosure, the lender takes over possession of the home and tries to sell it to cover the loan balance. This involves the court system, which is why the process can take so long to complete.
In a power of sale, the homeowner retains ownership of the property. Rather than taking over ownership, the lender will force the homeowner to sell the property on the public market. The court system is not involved in this process, which is why it’s a lot faster than foreclosure.
Do Foreclosures Affect Credit Scores?
Since foreclosures are reported to the credit bureaus, they can negatively affect your credit score. Generally speaking, a note about your foreclosure will remain on your credit report for anywhere between 7 to 10 years. That means you’ll have to wait that long before your credit score is no longer affected by your foreclosure.
How Long Does The Foreclosure Process Take?
Foreclosures can be very lengthy, which is one reason why lenders try to avoid them as much as possible. That said, there is no specific time frame for foreclosures. They can take a few months to complete, to over a year.
Multiple factors may be involved in the process that will determine how long individual foreclosures will take, such as the following:
- The home’s value or bank assessment
- The equity in the home
- The current economic climate
- The current real estate market
- The number of properties currently in foreclosure
Having said that, foreclosures take much longer to complete than the power of sale process, generally speaking.
Can You Stop A Foreclosure In Canada?
Lenders will initiate the foreclosure process when you’ve missed a series of mortgage payments. As mentioned, you’ll receive a copy of the statement of claim that your lender will file with the court. If you reply within 20 days, the court may allow you to bring your mortgage back to good standing by making up for the amount owed (including all penalty charges) to avoid foreclosure.
However, if you don’t come up with the money that you owe your lender, the foreclosure process will continue. The lender will place the home for sale to try and recoup any losses. That said, you may still be able to stop the foreclosure even after the home has been listed for sale if you can come up with the outstanding balance owed, as long as you do so before the property is sold.
Red Flags That You May Be Heading Toward Foreclosure
Spotting the warning signs early can make a difference when it comes to avoiding foreclosure. Here are some key red flags that may indicate you’re heading down that path:
- Missed/Late Mortgage Payments: Falling behind on your mortgage payments is often the first sign of trouble. After 90 days of missed payments, generally speaking, lenders may start to take steps towards starting the foreclosure process.
- Notices From Your Lender: Getting letters or emails from your lender about your missed payments, or threats of legal action, are tell-tale signs that the lender may be leaning towards starting the foreclosure process.
- Using Credit Cards For Essentials: Relying on your credit card to cover basic necessities, like groceries, utilities, or mortgage payments, can be a sign of financial strain.
- Declining Credit Score: Missed payments and increased debt can have a negative effect on your credit score.
- Depleting Savings: Using all your savings or retirement funds to cover mortgage payments may be a short-term fix, but it can lead to long-term financial instability.
- Being “Underwater” On Your Mortgage: If the value of your home drops below your mortgage balance, you’ll have “negative equity“. Being underwater on your mortgage makes selling or refinancing difficult and can increase the risk of foreclosure.
How To Avoid Foreclosure
Even if you’re having financial troubles that are making it difficult for you to keep up with your mortgage payments, it’s important to do whatever you can to avoid falling into the foreclosure trap. Consider the following to prevent yourself from losing your home.
Speak To Your Lender
The first thing you should do is set up a chat with your lender to discuss the financial issues you’re having. As mentioned, you may be able to come up with a slightly different plan that will ease your financial woes.
If possible, speak with your lender before you miss your first payment if you think you won’t be able to make it. Ask them if there’s anything that can be done to rectify the situation. Your lender may allow you to extend your amortization, which would help lower your monthly payments.
If you do miss a few payments, don’t ignore any communications that come from your lender, as this can start the foreclosure process. And if you wait too long, you may be too late to stop the process in its tracks.
Bring Your Mortgage Back To Good Standing
If you’re able to gather enough money, you may be able to put it towards your mortgage to bring it back to good standing. Essentially, you’d be reinstating your mortgage by paying the total amount owing, including late fees.
However, this may require a significant amount of money to stop the foreclosure process, which may be difficult given the position you’ve already found yourself in due to missed payments.
Defer Your Mortgage Payments
Before you miss your first payment, approach your lender and ask if there’s any way to defer your mortgage payments. This involves temporarily pausing your payments to give you some time to improve your finances before payments resume once again.
The government of Canada requires that your lender work with you to come up with a solution as part of the country’s consumer protection and financial stability initiatives. The lender may extend the amortization period to lower your payment.
Keep in mind that these payments are not cancelled and will eventually need to be covered. Plus, the interest will continue to accrue during the deferral period, so you could wind up paying more overall.
Refinance Your Mortgage
A refinance involves taking out a new mortgage and using the funds to pay off your existing mortgage. Homeowners often refinance to take advantage of lower interest rates or change the amortization period. In your case, you may be able to use a mortgage refinance to extend your amortization period to lower your mortgage payments and make them more affordable for you.
Sell Your Home
If you haven’t yet missed a mortgage payment but believe you likely will be based on your current finances, consider selling your home before you find yourself a few months in mortgage arrears. It may not be a pleasant thing to do, but at least you’ll be able to collect the proceeds of the sale and retain your home equity while avoiding a bad stamp on your credit report. But this option will only be available before you start racking up missed payments.
File A Consumer Proposal
If you’re having trouble covering your mortgage payments because of high debt, perhaps filing a consumer proposal may help. While a consumer proposal won’t stop foreclosure, it can help you deal with your current debt and free up some much-needed cash to put towards your mortgage payments.
A consumer proposal is an agreement between you and your creditors to settle your debts. Your Licensed Insolvency Trustee will renegotiate what you owe and come up with an arrangement whereby you repay a portion of your outstanding debt based on what you can afford.
Learn more: Is A Consumer Proposal Worth It?
Consider Bankruptcy
While not an attractive option, bankruptcy could help you avoid foreclosure, even temporarily. Bankruptcy won’t legally stop foreclosure since it doesn’t deal with secured debt, which is what a mortgage is.
But, bankruptcy may help you deal with any other debt issues you may have and improve your cash flow so you’ll have just enough money available to catch up on your mortgage payments.
It should be noted that bankruptcy doesn’t necessarily mean you’ll lose your home, which is a common misconception about the process. While that certainly may be the case in many circumstances, it doesn’t always happen.
As long as you remain up-to-date on your mortgage payments, bankruptcy laws in Canada will protect you. More specifically, mortgage holders cannot cancel your mortgage as a result of you filing for bankruptcy.
Alternatives To Foreclosure In Canada
If you’re facing financial hardship and can’t keep up with your mortgage payments, there are alternatives that may be available. Two key options are deed in lieu of foreclosure and short sales, both of which can be less damaging than foreclosure.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure lets a homeowner voluntarily offer ownership of their homes to the lender to avoid foreclosure. It helps settle mortgage debt without having to go through court, which can be less damaging to your credit score than a full foreclosure.
For this to work, the lender must agree to the arrangement, and the home must be free of other liens or legal issues. It’s typically used as a last resort if selling your home or refinancing isn’t possible.
Short Sale
A short sale is when a homeowner sells their home for less than what they still owe, usually because of financial hardship. Again, it may be used to avoid foreclosure and may have a smaller impact on your credit score than a forced sale.
The lender must approve the sale and agree to accept the lower amount as full repayment. You’ll also need to show proof of hardship, like job loss or medical bills, to qualify.
Learn more: What Is A Short Sale In Canada?
Final Thoughts
The best way to avoid foreclosing on your home is to make sure you keep up with your mortgage payments. And if you can’t, you may want to get in touch with your lender to make alternate arrangements. Otherwise, you may want to speak with a real estate attorney or Licensed Insolvency Trustee to help minimize the damage caused to your financial and credit health.
