New homebuyers never purchase a house intending to default on their mortgage. However, with homeowners renewing their mortgages at much higher rates than originally expected, this is the current reality for many Canadians.
If you’re in a position where you can no longer afford your mortgage or property tax payments, your lender can sell your house to recoup the money with a power of sale.
What Is A Power Of Sale?
If you miss your regular mortgage payments and default on your loan, your lender can take action to recover the amount you owe them. The specifics of how the lender gets its money back are in the terms and conditions of your mortgage. One option is through a power of sale. In a power of sale, your lender has the authority to sell your home to recoup what you owe.
What Happens During A Power Of Sale?
Defaulting on your mortgage is what initiates a power of sale. There are several ways to default on your mortgage. The obvious one is missing your monthly mortgage payments. Not paying your property tax or breaking your mortgage contract in other ways can also be considered a default.
What happens during a power of sale can vary slightly between provinces. Here’s how it works in Ontario according to the Mortgage Act.
Power Of Sale Process In Ontario – An Example
Once you default, your lender has to wait at least 15 days before they can deliver a notice of sale.
The notice of sale outlines how much you owe on your mortgage, interest, and taxes. It also provides a date when your payments are due.
You have 30-40 days after the notice to come up with the money and pay your debts. This is known as the redemption period. If you can’t get the money, your lender can sell your house.
If there’s no power of sale in your mortgage terms, a lender can exercise a statutory power of sale after you’ve defaulted for three months and has to provide 45 days’ notice before selling the property.
After your house sells, your lender will use the proceeds to pay off the principal, interest, and expenses incurred during the sale of your house.
If there’s any money left over, you get to keep it.
Power Of Sale vs Foreclosure: What Is The Difference?
While the terms ‘power of sale’ and ‘foreclosure’ are often used interchangeably, there are some differences.
How The Borrower Is Treated
In a power of sale, the lender is obligated to try and sell the house for the highest price possible. After the house sells and the mortgage, interest, and other expenses (e.g. realtor and legal fees) are taken care of, any remaining profit goes to the homeowner.
However, if the sale doesn’t cover all the costs, the homeowner is responsible for paying the remaining balance.
In a foreclosure, when the lender takes over the property and sells the home, they take over ownership and owe the homeowner nothing. However, the lender also takes on any debts or liabilities associated with the property.
Which Provinces Use Which Process
A power of sale is more frequent in Ontario, New Brunswick, Prince Edward Island (PEI), and Newfoundland and Labrador, while foreclosures are more common in the rest of the country.
The Speed Of Each Process
A power of sale is generally faster than a foreclosure because it doesn’t have to go through the court system. While different provinces have different timelines, it’s possible for a home to sell in as little as two weeks after notice is given.
Do Lenders Need To Provide Buyers With A Notice?
Ontario
In Ontario, a lender must wait at least 15 days after mortgage default to provide a notice. The notice is meant to alert the borrower of the lender’s intention to use a power of sale. The lender needs to send the notice at least 35 days before the power of sale is initiated.
New Brunswick
In New Brunswick, a notice of sale is required four weeks in advance of the sale. The document must include details about the time and place of the sale.
Prince Edward Island
In the province of PEI lenders also have to deliver a notice before a power of sale, but when this happens varies. PEI’s Real Property Act doesn’t provide specific times for when the notice has to be delivered.
Newfoundland & Labrador
A lender can not exercise a power of sale in Newfoundland & Labrador until notice is given to the borrower. The borrower has 30 days after the notice to pay their debts.
Can You Stop A Power Of Sale In Canada?
It is possible to stop a power of sale in Canada. For instance, once the notice has been given, the borrower has time to bring the mortgage into good standing.
This means that if you can pay back your missed mortgage payments, property taxes, and any other debts and get back to good standing, you can avoid a power of sale.
How To Stop A Power Of Sale
While you can stop a power of sale in Canada, you need to act fast. Remember, once the redemption period ends, your lender can sell your house.
Here are a few strategies you can consider if you want to stop a power of sale:
- Sell your house. If you can no longer afford your mortgage payments, consider selling your house and paying off your debts. This can help you to avoid legal and administrative fees associated with a power of sale.
- Renegotiate your mortgage. Speak to your mortgage lender to renegotiate the terms of your mortgage. Your lender is required to work with you to come up with a solution. Reach out as soon as possible.
- Take out a second mortgage. A second mortgage allows you to turn the equity you’ve built in your home into a cash loan, which you can use to pay off your debts.
- Apply for a personal loan. If you have a high credit score, consider using a personal loan to pay off your debts and get your mortgage back in good standing. Or, if you have a HELOC you could consider using that to pay off your mortgage until you can afford it again.
Should You Buy A Power Of Sale Home?
With a power-of-sale home, there’s no guarantee you’ll get a good deal. Remember, the lender is obligated to sell the house at fair market value, so you can’t go into the sale expecting a huge discount.
Unlike a regular sale, you can’t negotiate any home repairs or fixes before you purchase the home. You take it as it is. This means you could purchase a home that isn’t in the best condition.
You also won’t have the opportunity to get answers to questions about the house from the homeowner. In this situation, it’s the lender selling the house.
To try and minimize your risks, consider having a home inspection before you make a decision. This can at least let you know if there are any major red flags to watch out for. You can also consult professionals such as a real estate agent or real estate lawyer for more guidance and information.
The Bottom Line
If you’re struggling to make your mortgage payments or you’ve already missed one, reach out to your lender as soon as possible to see if they can help. If your lender initiates a power of sale, you have the redemption period to try and repay your debts. However, if you can’t come up with money to bring your mortgage into good standing, you can consider selling your home. You can also speak to a real estate professional or lawyer for assistance in navigating this process.
