Power of Sale FAQ

Borrowers who have defaulted on a mortgage loan can face a power of sale. Although foreclosures are another option for lenders to recover their fees and loans, the power of sale is more common in Ontario. 

What Is a Power of Sale?

A power of sale is a tool lenders can use to recover their expenses, fees and interest after a borrower has defaulted on a mortgage. It’s a strict process that involves several different steps. If the process goes to the end without the homeowner stopping it, they can be evicted, and the property can be sold. 

How Does a Power of Sale Differ from Foreclosure?

Both are legal tools that a lender can use when a borrower defaults on a mortgage. However, there are some big differences.

For example, the power of sale is much more common in Ontario because it costs less and is faster. Foreclosure is more complicated and involves more court processes.

• With a power of sale, the borrower may receive surplus funds when the property is sold. They also have a chance to pay off the arrears and stop the process. However, at the end of a foreclosure, the borrower has no rights and won’t receive surplus funds when the place is sold. 
• With the power of sale, the lender doesn’t take ownership of the house or property; they are given legal rights to sell the property to recover the outstanding debt. With a foreclosure, the bank or trust company will take ownership of the house and property. When this process is finished, the borrower loses all their rights to it.  

What Are the Steps Involved in a Power of Sale Process?

Here’s an overview of the steps involved. 

• The power of sale begins shortly after a borrower breaks one of the terms of a mortgage agreement. Usually, they haven’t made one or more payments, but there are other defaults, including the breach of a covenant. These include not paying the realty taxes, damaging the property on purpose, or using it for illegal purposes. Not insuring a property is also a reason for one of these breaches.
• Next comes a Notice of Sale Under Mortgage. This is mailed by registered letter, and who it is mailed to is governed by the Mortgages Act. A lender needs to wait 35 days (known as the Redemption Period) after this is mailed or 40 days if a married couple occupies the property before they can move on with the power of sale process.
• During the Redemption Period, a borrower can bring the mortgage back into good standing or ultimately pay it off. Any legal fees the lender has had to pay must be included. If this doesn’t happen, the lender can file a Statement of claim, demanding the money repaid in full. The borrower is then given a chance to file a Statement of Defense. Barring that, the lender gets the default judgment, and a court motion allows for a Writ of Possession to be issued. 

After this stage, the lender evicts the previous owners, and they take possession of the property.   

How Can I Avoid a Power of Sale on My Property?

Not everyone can take advantage of the Redemption Period discussed above. Likewise, they might be unable to file a Statement of Defence to stop a power of sale process. There’s another avenue–an alternative loan.

You can get one from a private lender who bases your acceptance on equity rather than a credit score. The money you get from one of these lenders can stop a power of sale process. They base the application on equity, which is the same as a Loan-to-Value (LTV) ratio.

The LTV Formula 

The formula for an LTV includes the loan amounts and mortgages requested on a property and the market appraised value. Here’s an example. A property might be worth $400,000. If a borrower wants a $300,000 loan, then the LTV formula works out to be 75%.

Private Lender Costs 

Borrowers must remember that alternative loans have higher fees since they are at higher risk. As of August 2024, many alternative lenders have rates between 8 and 12%. They also have other fees that can add 4 to 8% to the total mortgage amount. Those can include lender, broker and legal fees. Remember that private mortgages come in short terms, and interest-only payments are also necessary. The loan can be renewed at the lender’s discussion at the end of the term.

What Should I Do if I Receive a Notice of Intention to Enforce Security?

Getting one of these notices means the lender is ready to take legal action, which can usually lead to a power of sale and a foreclosure. Borrowers receive a notice of intention to enforce security when they’ve defaulted on their loan. Here’s what they need to do. 

Make sure you review all the information in the notice. It should outline why the mortgage defaulted, including not making payments or breaching a covenant. These are listed above. The document should also outline how much money you owe and any timeline for resolution. 

If you receive a notice of intention to enforce security, contact a lawyer and ask for advice. You can even try the lender to see if they are open to some loan modification or payment plan.

Consider what an alternative lender can do for you. A private lender can provide money for a second mortgage if you have a certain amount of equity in the property. This money can stop a power of sale, but you must remember that you won’t pay the principal. 

How Long Does the Power of Sale Process Take?

A power of sale generally takes 3 to 6 months from beginning to end, but that depends on some specific situations. For example, after a lender sends a Notice of Sale, they can proceed to the next steps after 35 days. However, that can be 40 days if the house or property is owned and lived in by a married couple. 

That’s just one of the situations that can add to the process’s length. There’s also a Redemption Period. After a Notice of Sale is issued, that’s the time allotted to the borrower to pay off the entire debt owed by bringing the mortgage into good standing or paying off the whole debt, including the lender’s legal fees.

If the process goes to where the homeowners are evicted, the property can be sold, and the sale proceeds will be divided. Two appraisals are necessary to make sure the lender sells at market value. Depending on the real estate market cycle, that can add more time to the process.     

What Happens to My Credit Score if My Property Is Sold Through a Power of Sale?

Even before the property is sold through a power of sale, missed mortgage payments are reported to credit bureaus. Equifax assigns 35% of your credit score to payment histories that include mortgage loans. Another 10% is classified as public records, which cover collection issues.

If you default on your mortgage and your property is sold through a power of sale, that default status can stay on your credit report for up to 7 years. 

How Can PowerofSaleOntario.ca Assist with Power of Sale Situations?

Jonathan and Ron Alphonso are real estate professionals who maintain two leading websites, mortgagebrokerstore.com and powerofsalesontario.ca. Reach either at 416-499-2122 or by email at ron@powerofsalesontario.ca. Mortgage Broker Store offers several alternative lending solutions, including a second mortgage. The money from one of these loans can stop a power of sale. You can get free advice on the same subject at Powerofsaleontario.ca.

jonathan October 8th, 2024

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