When it comes to financial difficulties, few things can be as stressful and overwhelming as losing your home.
Unfortunately, many homeowners in Canada face this situation every year, either because they can’t keep up with their mortgage payments or because they’ve experienced unexpected life events that have impacted their ability to pay.
In these cases, the lender may resort to legal actions to recover the debt, such as the power of sale or foreclosure. However, despite being common practices, these terms are often surrounded by confusion and misinformation, making the situation even more confusing and scary for the homeowner.
This blog post explores some of the most common misconceptions about the power of sale and foreclosure and their legal implications.
How does power of sale work?
The power of sale gives the mortgage lender the legal right to sell the property to recover their financial losses. Should the borrower fail to fulfill their obligations under the mortgage, the lender has the right to repossess the property and sell it.
It is important to note that before exercising the power of sale, the mortgage lender must notify the borrower. This notice will provide a limited amount of time, typically 35 days in Ontario and even less elsewhere, for the borrower to correct the default. Should the borrower not adhere to the conditions, the lender has the legal right to evict them and sell the property. If any money is left over after all parties have been paid, the lender will return it to the borrower. However, if everyone else has not been paid what they are owed, the lender may sue the borrower for the remaining amount.
Protecting your rights during Power of Sale and foreclosure proceedings
As a borrower, it is important to understand that your lender has legal recourse to recover losses if you fail to keep up with your mortgage and property tax payments or maintain adequate home insurance. Breaking any rules of your mortgage contract can also lead to legal action from your lender. The following circumstances are important to understand as a borrower:
- Lenders may utilize a power of sale procedure to recoup damages in Ontario, New Brunswick, Newfoundland and Labrador, and Prince Edward Island. Foreclosure is applied throughout the rest of Canada.
- In both cases, the lender has the right to take possession of the property and remove the borrower from it.
- Default on mortgage payments: If you default on your mortgage payments, your lender can initiate legal proceedings to sell your home.
- The power of sale allows the lender to sell the property without involving the court system. The specific requirements for this process differ between provinces. Compared to foreclosure, the power of sale process is typically quicker and less costly.
- Foreclosure process: If you default on your mortgage payments for an extended period of time, your lender can initiate foreclosure proceedings. This legal process involves the lender going to court to obtain a court order to take possession of your home and sell it to recover the outstanding mortgage debt.
- Breach of mortgage terms: If you breach any of the terms of your mortgage agreement, such as failing to maintain the property or not paying property taxes, your lender can take legal action to compel the sale of your home.
- If you sell your property without paying off your mortgage, your lender can sue you for selling your home to recover the outstanding mortgage debt.
Power of sale vs Foreclosure
|Power of Sale||Foreclosure|
|The process can begin 15 days after the first missed payment.||The process begins 3 to 6 months after the borrower defaults.|
|Here the lender doesn’t require to go to court to send a notice.||The lender must go to court to obtain a court order to sell the property.|
|Here, the lender must sell the property for its fair market worth.||Here the lender is not bound under any obligation to sell the property at the highest available price.|
|Here the profit is given to the borrower.||Here the lender holds the right to hold onto the additional gains.|
|In case of a shortfall, the lender has the right to sue the borrower.||In case of a shortfall, the lender cannot sue the borrower.|
The Bottom Line
A power of sale or foreclosure is a difficult situation for any homeowner, but it is necessary to help lenders recover their funds. To avoid a power of sale, homeowners who are behind on their mortgage payments should communicate with their financial institution as soon as possible. Additionally, seeking legal assistance from experienced lawyers can be helpful.