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Power of Sale Vs Foreclosure Explained

Owning a home in Ontario, and in particular, the major urban centers such as Toronto can be very costly. The Toronto cost of living index is one of the highest in the country with an estimated $3,365 per month estimated to sustain a family of 4, before factoring in monthly mortgage payments.  

House prices also continue to appreciate, despite the ongoing pandemic.  Home sales have also increased through 2220. The average Ontario selling price of a single detached dwelling has increased to 685,000 thousand as of January 2021.

Despite the high costs associated with owning a home In Ontario, mortgage arrears are still very unusual. Out of the owned properties in the Province,  2,652 properties have fallen into arrears which represent less than 1% (0.11%) of properties where mortgage default has become an issue. There are times, however, when meeting monthly mortgage payments becomes too much of a financial squeeze and there may be a mortgage default.

Power of Sale and Foreclosure Defined- Some Key Differences

Your lender may have chosen to include in your mortgage contract, a clause to outline the lender’s right to initiate proceedings when dealing with mortgage default. This clause is optional, however. Under the Ontario Mortgages Act, the right to the power of sale or foreclosure is given to all mortgage lenders. When an Ontario homeowner falls behind in mortgage payments (mortgage is in arrears) a lender has the power to take steps and try to sell the property to avoid losses.

 In Ontario, the method that is most commonly used to deal with mortgage loan default is Power of Sale. So what exactly is Power of Sale? This term refers to the lender legally taking the right to sell the property. The lender has been given the power to sell a home or property. In the event of Power of Sale, the homeowner still owns the home (the title is still under the owner) but the lender now has the legal right to evict the current owner using the sheriff and proceed to sell it. 

The profit made from the sale of the property will go back to the owner, minus the vast sum that the lender will deduct to pay off all legal, administrative, and closing costs associated with the sale of the property. The high costs associated with selling the property will diminish the profit considerably.  

If the cost of selling the home by the lender costs more than the profit made on the property, the lender has the legal right to sue the owner for compensation.  The whole process can typically take a few months at little cost to the lender. As a borrower, you will be subject to extremely high fees ranging up to 30,000 dollars in the power of sale proceedings.

            There are clear steps in the power of sale process that the lender must take to legally have the owner evicted from the property and sell the house. These steps are clearly defined as:

  1. Allow for 15 days– once a borrower has missed a payment or is substantially late or has broken another mortgage term such as failure to pay insurance on the property, the Ontario Mortgage Act requires that you provide a borrower 15 days to try to rectify the situation before a lender, traditional, or private can exercise the power of sale. 
  • Send a Notice of Sale to Borrower-Once 15 days have passed after a term of your mortgage contract has not been met, a lender is now entitled to send a letter to your borrower. This letter is referred to as a notice of sale which will inform that the mortgage is in default. The notice of sale letter will inform the owner that there is a redemption period to try to put the mortgage in good standing.
  • Lender Will Issue a Statement of Claim- If the homeowner does not pay what is due by the end of the redemption period, the lender has the legal right to issue what is called a Statement of Claim to address the debt owning and take possession of the property.
  • Lender Can Take Possession of the Property– After the Statement of Claim has been issued and the borrower has neither paid off the entire mortgage loan plus legal fees nor put the mortgage in good standing and after a judge has issued a judgment for possession, the lender is now in the position to take possession of the property. The lender can now take legal steps to evict by asking the court for a Writ of Possession. The current owners will be asked to evict the property at a specified date. If they do not leave voluntarily, then they may be forcibly removed by the authorities. Note that neither the lender nor a lawyer can physically remove the homeowner from the property, only a sheriff can do this.
  • Take Steps to Sell the Property- This is the final step of the power of sale proceedings. The lender can legally possess the property and attempt to sell the property in the condition it is currently in. The potentially high fees associated with selling the property will be the responsibility of the owner, The profit will go to the former homeowner but substantially reduced by the cost of the power of sale.

What is foreclosure then? There are several key differences between the Power of Sale process and foreclosure. The most significant difference between the method of Power of Sale and Foreclosure is that when a property goes into foreclosure the lender takes over ownership of the property. The lender is responsible for all potential gains on the property as well as all liabilities.

Foreclosure typically involves lengthy court proceedings to carry out and can be costly. When taking over ownership of the property the lender is entitled to keep any profits made but does not have the legal right to sue the borrower for any shortfalls. The foreclosure process is much longer than that of power of sale. Typically up to a year compared to under 6 months for the process of the power of sale.

Because the lender now has ownership over the property there is the obvious upside of retaining any profits made on the sale of the property. This is not without risk for the lender as now the lender is on the hook for any liabilities associated with that particular property. 

In both foreclosure and power of sale, the action must start with a Notice of Sale sent at least 15 days after default. However, many lenders may take more time and wait for multiple missed mortgage payments before taking action. The redemption period in foreclosure is usually 30 days and the lender can not sue for any shortfall in the foreclosure process. The homeowner will also receive a Statement of Claim which will inform the homeowner that the method used will be foreclosure.

The most significant difference between the process of the power of sale and foreclosure can be defined by three major criteria:

1. The involvement of the courts. 

 Foreclosure is a legal process involving lawyers and the court’s approval. The lender must make an application with the courts to start the foreclosure process. Foreclosure is used commonly in other Provinces when dealing with mortgage arrears. 

2. How the proceedings are initiated

Unlike,  power of sale, in the event of a foreclosure (Judicial sale), the lender will have to apply to the court asking for permission for the court to start proceedings.

3. Time that each process takes

Due to the involvement of the courts, and by extension lawyers, the time the foreclosure process will take will differ considerably. The foreclosure process takes considerably more time because of having to make an application directly to the courts. The lender will not be required to go through the courts under a power of sale.

Let Mortgage Broker Store Help You if You are in Mortgage Arrears

            It can be very stressful when faced with an imminent power of sale or foreclosure on your valued home. Many reasons led to your mortgage falling into arrears. There are just as many reasons to try to put your mortgage in good standing and avoid the potential consequences of a power of sale or foreclosure on your property.

            Mortgage Broker Store is in the position to help guide you through your options while ensuring you have access to a broad network of lenders that can help lift you out of arrears and stop any power of sale or potential foreclosure on your home. Don’t hesitate to contact us at your convenience to answer any concerns you may have.

February 23rd, 2021

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