Defaulting on a mortgage can be a daunting prospect for homeowners, potentially leading to a cascade of financial and legal consequences. It can lead to the sale of your property to recover the mortgage debt, which in turn can impact your credit and potentially lead to financial loss. Unfortunately, the number of Canadians concerned about defaulting on a mortgage or major loan payment rose at the start of the year. Mortgages are essential for most when it comes to home ownership. For this reason, understanding what happens when you default on a mortgage is crucial for both borrowers and lenders alike. When you take out a mortgage, you’re essentially promising your lender that you will repay the amount of money you’ve borrowed over an agreed period of time. But what happens when life throws you challenges, and you can’t make your mortgage payments? Defaulting on a mortgage is a difficult situation, but understanding the process can help you to avoid it. So, what happens when you default on a mortgage in Canada? In this article, we delve into the intricacies of mortgage default in Canada, its implications, and how to avoid it.
What does it mean to default on a mortgage?
Simply put, default occurs when a homeowner fails to meet their mortgage payment obligations as outlined in the mortgage contract. This can happen for various reasons, including financial hardship, job loss, or unforeseen expenses. When a borrower defaults on their mortgage, it triggers a series of legal and financial consequences, potentially leading to actions such as foreclosure, where the lender seeks to take possession of the property and sell it to recover the outstanding debt. Defaulting on a mortgage can have serious implications for the homeowner’s credit rating, financial stability, and emotional wellbeing, making it crucial for borrowers to understand and address any challenges they may face in meeting their mortgage obligations as soon as possible.
What happens when you default on a mortgage in Canada?
When a homeowner defaults on their mortgage in Canada, the lender typically initiates a series of steps to address the situation. The specific process may vary depending on the province or territory in which the property is located, as well as the terms outlined in the mortgage agreement. However, there are several common steps that lenders typically take in response to mortgage default:
Missed payments
If you make your mortgage payments in full each month, your lender will not need to take any action against you. The moment this begins to slip and you have a missed payment is when things can begin to go wrong. It could be a mistake, or it could be that you’re feeling the pinch, but once you’ve missed a payment, your lender will usually wait a grace period of around 15 days before you’ll need to pay a late fee. If you spot the mistake and are able to find the funds to make your mortgage payment, the slip will often be ignored. If, however, your mortgage payment continues to go unpaid, your lender will likely reach out to discuss the scenario. At this point, communication and transparency with your lender is everything. Burying your head in the sand and ignoring calls will only make the problem worse further down the line.
Notice of default
The first course of action for lenders is often to issue a notice of default to the homeowner, informing you of your missed payments and providing a specified period to remedy the situation. If you fail to address the default within this timeframe, your lender might proceed with legal action to enforce the mortgage contract. Should you miss a couple of payments in a row, the situation will begin to get more serious. Demand letters are formal requests for the missing funds. In this instance, you should reach out to your mortgage lender to discuss potential options, like a payment plan. If the lender does not receive a response to their demand letter, they could pursue legal action against you.
Power of sale or foreclosure
A common action for lenders in the event of mortgage default is foreclosure, or power of sale, depending on your province of residence. Foreclosure is a legal process through which your lender seeks to take possession of your property and sell it to recoup the outstanding debt. The proceeds from the sale are used to satisfy the mortgage debt, with any surplus returned to the homeowner. In Ontario, a power of sale is used – unlike foreclosure, power of sale allows your lender to sell the property without taking ownership legally, making it a quicker process. When they sell the property, the lender recovers the mortgage payment owed, as well as any interest and fees. If the sale doesn’t cover the outstanding mortgage amount, you’ll need to pay the difference.
Additional consequences
In addition to foreclosure, lenders may also pursue other legal remedies to recover the outstanding debt, such as obtaining a judgement against the homeowner or placing a lien on the property. These actions can have serious implications for your credit rating and financial wellbeing, potentially making it difficult to secure credit or obtain financing in the future. In addition, defaulting on your mortgage can have an emotional impact. The thought of losing your home and facing financial loss can be stressful and anxiety-inducing, in some cases leading to mental health problems.
How to avoid defaulting on your mortgage
The concept of defaulting on your mortgage can seem intimidating, but no matter how bad you might feel your situation is, there is always a solution. To mitigate the risk of mortgage default, it’s essential to be proactive in managing your finances and addressing any challenges that may arise. This may involve seeking assistance from a Licensed Insolvency Trustee (the only professionals in Canada legally able to file all forms of debt relief), exploring options for refinancing or loan modification, or accessing available support programs or resources. At Spergel, we have been helping Canadians for nearly 35 years, and we can share invaluable advice and insights, help to mediate discussions with your lender, and guide you towards the best solution for your circumstances.
What happens when you default on a mortgage in Canada? FAQs
Here are some of the most common questions we receive about what happens when you default on a mortgage in Canada:
What happens in Canada if you don’t pay your mortgage?
In Canada, if you fail to pay your mortgage, it can lead to serious consequences. Initially, the lender may issue a notice of default, providing you with a specified period to rectify the missed payments. If the default is not addressed within this timeframe, the lender may initiate legal proceedings, which can ultimately result in foreclosure or a power of sale. Both are legal processes through which the lender seeks to sell the property to recover the outstanding debt. Additionally, your credit rating may be adversely affected, making it challenging to secure credit or obtain financing in the future. Defaulting on a mortgage in Canada can have significant financial and legal implications, underscoring the importance of addressing any difficulties in meeting mortgage obligations promptly and proactively.
What happens when you walk away from a mortgage in Canada?
Walking away from a mortgage in Canada, also known as strategic default, is a complex decision with significant consequences. When you choose to walk away from your mortgage, you stop making payments and effectively surrender the property to your lender. This action can lead to foreclosure proceedings, where the lender seeks to take possession of the property and sell it to recover the outstanding debt. Additionally, your credit rating may be severely impacted, making it difficult to obtain credit or financing in the future. While walking away from a mortgage may provide temporary relief from financial obligations, it’s a decision that should be carefully considered, taking into account the long-term consequences and potential legal implications. Consulting with a reputable Licensed Insolvency Trustee can help you to understand your options and make informed decisions regarding your mortgage obligations.
Are mortgages recourse loans in Canada?
Yes, mortgages in Canada are typically recourse loans. This means that in the event of default, the lender has the right to pursue legal action against the borrower to recover any outstanding debt not covered by the sale of the property. In other words, if the proceeds from selling the property are not sufficient to fully repay the mortgage debt, the lender can seek additional compensation from the borrower’s other assets or income. Recourse loans provide lenders with added security, as they have recourse to the borrower’s personal assets beyond the mortgaged property. However, it’s worth noting that there are certain exceptions and variations in recourse laws across different provinces and territories in Canada, so borrowers should consult legal experts for specific guidance regarding their mortgage obligations.
Defaulting on a mortgage in Canada can have far-reaching consequences for homeowners, both financially and emotionally. By understanding the implications of mortgage default and taking proactive steps to address any financial challenges, you can better protect yourself and your family from the potential risks associated with default. If in doubt, book a free consultation with Spergel, the ‘get rid of debt’ people.