Do I Lose My Equity With a Power of Sale?

Power of sale in Ontario is a legal process that has several steps. When a homeowner breaches the conditions of the mortgage, a lender can start this process, which can ultimately result in evicting the borrower.

If you give in and let the power of sale happen, you’ll likely lose your house and the equity you’ve built up.

There are emotional and financial consequences to letting that happen. However, there are solutions to prevent that kind of result.  

Understanding the Power of Sale Process

In Ontario, Canada, the power of sale is more common than a foreclosure. It’s a process lenders use when borrowers break the terms of a mortgage agreement. Quite often, that means they’ve missed one or more payments on their mortgage. There are other ways to default on a mortgage, including breaches of a covenant.

Those can include not insuring the property or paying the taxes, damaging the property on purpose, or using it for an illegal purpose.

 There’s a strict process for a power of sale:

• The lender needs to wait 15 days after the mortgage agreement has been defaulted on to deliver a Notice of Sale. After that, the same lender needs to wait 35 days or 40 days if married people occupy the home or property before they can proceed.
• The borrower is allowed a waiting period known as the Redemption Period, during which they can bring the mortgage into good standing or pay off the entire debt. However, that would need to include legal fees the lender has had to pay.
• A Statement of Claim is issued if the borrower doesn’t follow through.
• They also have a chance to defend themselves with a Statement of Defense. Otherwise, the process proceeds to a default judgment and a Writ of Possession.

At that point, the lender can apply for an eviction at the local enforcement (sheriff) office. After the sheriff performs the scheduled eviction, the property is listed, then sold, and the proceeds are used to pay off different debts. Most of the time, the homeowner gets no money from the sale of the property.

What Happens to Your Equity During Power of Sale?

So, naturally, people wonder, if the power of sale ends, what will happen to their equity? Remember, equity is defined as the mortgage-free part of the home.

During the Redemption Period, only arrears plus fees may be paid. After that, the entire mortgage amount must be paid.

There’s no ownership transfer to the lender during a power of sale. They only have the legal right to sell the property, and the proceeds are divided up as follows:

• As you might imagine, the lender gets paid first. That includes all of the costs they’ve incurred in selling the property, like real estate lawyers’ fees, real estate agents’ fees, and any other expenses and fees. They are also first in line for payment of their principal and interest and any other monies they are entitled to.
• Subsequent mortgages and execution creditors, as well as lien claimants, are following.
• The former homeowner is at the bottom of the list. 

While this process is better than foreclosure, where the homeowner is guaranteed to get nothing, it is less preferable to the homeowner selling themselves. After the eviction, the lender incurs more fees related to moving out contents and doing basic maintenance tasks. These fees are often much higher than what a homeowner would normally pay. While the lender must do their best to get a fair value for the property, they will generally put forth less effort to present and market the property than a typical homeowner. Since the priority for the lender is to recoup their investment, they may also take lower offers than a homeowner would accept.

If the process goes through and the house is sold, a homeowner can lose the equity they’ve built up. Quite often, there’s no money left for them.

Emotional and Financial Consequences of Letting Power of Sale Happen

If the lender doesn’t recover all of their investment, they can file a Writ of Execution for what’s left. Other fees, such as administrative charges, legal fees, and the money involved in enforcing one of these risks, can be added.

• That makes it hard for the former homeowner to get other loans.
• The former homeowner’s credit score can be further damaged.
• Any future loans will come with higher interest rates.
• Tax benefits associated with homeownership are forfeited.

Losing a home to a power of sale also has emotional consequences. People can feel insecure and unstable after the process goes through, and they get evicted. A power of sale is emotionally draining and causes anxiety.  

It can disrupt your family life, especially when you need to change their routines.

Of course, the damage to your credit score needs to be considered. Equifax reports that a power of sale or foreclosure can stay on your credit report for six years. These are called public records, and they make up 10% of your entire score.

Thankfully, there are other choices available. There’s no need to lose all your equity and possibly even more money after your house is gone.

Exploring Alternatives to Power of Sale

Talking to your lender as soon as possible is the first way to avoid a power of sale. There are several avenues you can pursue:

• You can look at different government resources and programs available to help struggling homeowners. Start researching answers with the Canada Mortgage and Housing Corporation (CMHC). 
• You can also ask a traditional lender for forbearance, which allows borrowers to reduce and/or pause payments. 

Getting a private loan, like a second mortgage, can provide you with the money to stop a power of sale. The application process is more flexible and streamlined than with a traditional loan. 

Private lenders require that you have a lot of equity built up rather than an excellent or passable credit score. These mortgage loans usually last for a year, and the payments are interest only. So, they are a good way to get back up on your financial feet, but not a permanent solution.

A second mortgage can act as a financial bridge, but you need an exit strategy from a private loan.

Worried About Losing Your Equity Through a Power of Sale? 

Jonathan and Ron Alphonso offer several private loan products, including second mortgages. Let them help you provide the money to stop a power of sale so you don’t lose your equity. Contact them by email at ron@powerofsalesontario.ca or by phone at 416-499-2122.

Learn more about the products and services they provide at mortgagebrokerstore.com and powerofsalesontario.ca

jonathan December 21st, 2024

blog, Power of Sale