In Ontario and the rest of Canada, a mortgage lender is able to take possession of a property if the borrower has not made or is unable to make their mortgage payments. Lenders may take possession by using either the power of sale or the foreclosure process. Both of these pathways result in a different outcome for the borrower, or homeowner, although many Canadians are unfamiliar with both of these processes. So, what is power of sale vs foreclosure? It is a question you need to understand if you have received a legal notice from your lender so that you know which process to follow. Both power of sale and foreclosure work to different timelines, and the amount you may receive after the repossession can vary somewhat. In this article, we will explain power of sale vs foreclosure so that you are able to understand your options should you find your mortgage payments in arrears while wanting to keep your home.
What is a power of sale?
A power of sale is the most common form of forced sale when a lender wants to take possession of a property when the homeowner is unable to make their mortgage payments. In this process, a lender will obtain the legal right to evict the residents of the property, and sell it in order to reclaim the amount owed on the mortgage. For most lenders, a power of sale is favourable because it is faster and involves less time spent in court. Consequently, the legal costs are also lower for lenders. In fact, lenders only need to wait just fifteen days after a missed payment to begin the process of a power of sale. Here is how the process of a power of sale typically looks:
- The lender will issue a Notice of Sale to the homeowner
- The homeowner has a redemption period of 30-40 days in which to bring mortgage arrears current
- A Judgement by the court will be issued
- A Writ of Possession will give the lender the right to evict the homeowner and the property’s residents, and to sell the home
With a power of sale, the lender must sell the property at a reasonable market value. Any proceeds that are made over and above the value of the mortgage debt must be paid out to the homeowner. Should a lender not follow these rules and instead to sell quickly at a price much lower than the market value, the homeowner can choose to pursue legal action against the lender for a loss in equity which should have gone to them. When a power of sale is complete, the lender will not make any other profit. In most instances if there is equity in a property, the homeowner will refinance to become current on their mortgage payments and avoid a forced sale. There may be a scenario where the proceeds of the property sale in a power of sale do not cover the mortgage balance and the associated fees. In this instance, the lender is able to pursue legal action against the borrower for the shortfall. As there is now no debt to hold this shortfall against, the shortfall becomes an unsecured debt.
What is a foreclosure?
A foreclosure is the process of a mortgage lender taking title of the property in question. This means that the lender takes on complete ownership and right to the property to do as they wish. They can either choose to rent out the property, or to sell it. Although the foreclosure process is similar to a power of sale, it takes much longer to achieve. Typically, there must have been a number of months of missed payments before action can be taken. As a lender will own the property after a foreclosure, they do not need to sell the property for the highest price unlike in a power of sale. They are also permitted to keep any proceeds that exceed the mortgage debt. They do not need to give any equity or profits to the borrower. With a foreclosure, the lender is also unable to pursue legal action for any shortfall they may face against the mortgage debt.
What are the differences between a power of sale vs foreclosure?
There are a number of differences when it comes to power of sale vs foreclosure. Firstly, they are two different processes, despite having a number of legal documents in common. For both processes, you will begin with a Notice of Sale followed by a Statement of Claim, and then a Writ of Possession. In the Statement of Claim, you will learn whether or not the lender has opted for a power of sale or a foreclosure. Here’s a summary of the differences between power of sale vs foreclosure.
|Action||Power of Sale||Foreclosure|
|Lender’s action||Lender obtains a right to sell||Lender obtains a legal title or ownership of the property|
|Timing||As soon as 15 days after a mortgage payment is missed||3-6 months after missed payments|
|Court involvement||No court involved||Lender files suit in court; court issues demand for payment|
|Redemption period||Usually 35-40 days to bring the mortgage payments current||Usually 30 days, with the ability to be extended|
|Lender’s duty||To sell the property at fair market value||No duty|
|Equity or profit||Paid to the borrower||Kept by the lender|
|Legal action||Lender can sue for a shortfall||Lender is not able to sue for a shortfall|
|Average completion period||Within 6 months||Over a year|
What should I do if I am threatened with a forced sale of my home?
Mortgage payments are often expensive, and you may be finding them even harder to make with the increasing cost of living right now. Coupled with car loan payments or debts including credit card debt or payday loan debt, unfortunately it is all too easy for debts to become overwhelming. With a home being most people’s most prized possession, it is likely the one you want to keep. Thankfully, it is possible to gain debt relief and still keep your home. This means you can avoid either a power of sale or a foreclosure. First of all, you should review your budget and see if you can figure out the cause of your debts. Is your home simply too expensive? Is it other unsecured debts that are creating difficulty for you? Once you have reviewed your financial situation, you may want to look at some options for debt relief to avoid either a power of sale or foreclosure on your mortgage. It is important to act quickly to avoid any further consequences. Here are some of the options you can take:
- Catch up on missed payments. If you have the funds available or can get hold of them easily, making your payments within the redemption period will put a swift stop to a forced sale. If you are past the redemption period, your lender may demand repayment of the entire mortgage which is more challenging to handle.
- Refinance with a second mortgage. This can help to bring the mortgage current and will work if you have equity in your home. You must, however, ensure you will be able to make your future mortgage payments.
- Restructure your mortgage. With your current lender or a different one, you may be able to extend your mortgage period which might reduce your payments and make them more affordable. A mortgage broker can help you in this situation.
- Sell your home or downsize. If your mortgage payments are simply too expensive, you may wish to sell your home and find a smaller, more affordable property. Renting may also be a good option for you while you get your finances in order.
- File a consumer proposal. With the support of a Licensed Insolvency Trustee, you may be able to reduce your unsecured debt by up to 80% to keep your home and make your mortgage payments much more affordable.
- File bankruptcy. Many Canadians do not realize that it is possible to file bankruptcy and keep your home. A bankruptcy is best for those looking to completely clear any unmanageable unsecured debt. You can keep your home while filing bankruptcy if you are able to keep your mortgage payments current.
- Walk away from your mortgage. If you simply cannot handle your mortgage, it may be best to hand the property back to your lender. If there is a shortfall after the property sale, you can file insolvency via a bankruptcy or a consumer proposal.
If you are struggling with mortgage payments in arrears and want to keep your home, your best bet is to speak to a reputable Licensed Insolvency Trustee. They will review your financial circumstances and help you to explore all of your options when it comes to debt relief. At Spergel, we have over thirty years’ experience of helping Canadians gain debt relief and making their mortgage payments more affordable. Book a free consultation today.