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What happens after you fail to make your mortgage payments in Canada?

 

Borrowers are legally obligated to make mortgage payments on time. The worst case scenario is that your property will go through foreclosure or power of sale process, depending on the regulations in your province.

Foreclosure vs. Power of Sale

If your province utilizes the Power of Sale process when the borrower defaults on the mortgage, the lender will have ability to sell the property to retrieve costs, including any administrative fees involved in selling the property. The lender does not have any permission to make changes to the property and the property can be sold on "as-is" basis. The lender will need to provide realtors with a certificate of power of sale in order to list the property for sale.

In a foreclosure scenario, the lender will take ownership of the property and the previous owner will be removed from the property’s title. Which means the lenders can renovate the property in order to sell it at a higher price.

However, in both Power of Sale and Foreclosure scenarios, the lenders do not get to keep the excess proceeds from the sale of the property. The lenders are only entitled to the amount that covers the outstanding balance of the mortgage plus any administrative costs incurred during the sale of the property.

For example, if your mortgage balance is $500,000 and the property went through a foreclosure or power of sale process and has been sold for $1,000,000 and the lender has spent $50,000 in realtor commission, marketing, legal, and other administrative fees in the process, the lender is only entitled to get $550,000 from the sale of the property and the rest $450,000 must be returned to the borrower.

How much time will I have before my property will go through foreclosure or power of sale?

Depending on the lender, lenders usually provide a redemption period if borrowers fail to make mortgage payments on time. Reminder and/or demand letters are typically mailed to the borrower from the lender on missed payments. After the redemption/grace period, the lenders typically mail out final notice of sale letters before proceeding with the foreclosure or power of sale process.

Lenders are more than willing to work with the borrowers to avoid additional administrative hassles to retrieve their entitled outstanding balance. Make sure you work with the lenders during these difficult times. With that said, lenders in some provinces such as Ontario are only legally obligated to provide a short period of only 15 days before they can start selling the properties.

Here is the order in which the proceeds of a sale under a Power of Sale or Foreclosure are distributed:

1. All expenses involved in the sale of the property such as realtor fees, legal fees, marketing and administrative costs
2. Outstanding interest and costs associated with the mortgage
3. Outstanding principal balance of the mortgage
4. Outstanding fees to other parties such as mortgage holders
5. Rental deposits made by tenants, if applicable
6. Lastly, the remainder excess to the borrower

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