For most Canadians, a house is the most extensive and most expensive purchase of their life. In most cases, this means financing through a mortgage and monthly payments. However, mortgage payments are usually the most significant monthly obligations, so when financial issues arise, they can quickly become the biggest problem.
If you fall behind on mortgage payments, your lender has two options: a power of sale or foreclosure. While they are similar and share many documents, they have distinct differences affecting your finances and ability to stay in the home.
This blog will explain both processes and their differences and which options you want to avoid.
What Is a Power of Sale?
While most people automatically connect foreclosure with the consequences of missed mortgage payments, the power of sale is Ontario’s most common forced sale process. Here, the lender in the mortgage (mortgagee) obtains the legal right to evict the residents of a property and sell it to recover funds owed.
Generally, lenders prefer the power of sale over foreclosure for a few reasons:
- It is faster,
- It involves less court time and
- Legal costs are lower.
The lender can initiate the power of sale process only 15 days after a missed payment. Let’s have a look at the power of sale process in Ontario:
- Issuance of a Notice of Sale by the lender,
- 30-40 day redemption period during which you can bring mortgage arrears current,
- the issuance of a judgement by the court, and finally,
- a Writ of Possession gives the mortgage lender the right to evict occupants (with the assistance of the Sheriff) and sell your home.
Once the mortgagee has the Writ of Possession and can sell the property, they have the fiduciary duty to sell it at fair market value. Any proceeds above the mortgage debt are paid to the homeowner, and if the lender tries to make a quick sale at a discount, the homeowner can sue the lender for any loss in equity they should have received.
As the proceeds above the mortgage debt go to the homeowner, mortgage lenders typically don’t earn any additional profit on the sale. Most homeowners will refinance if the home has equity and bring the mortgage current to avoid a forced sale.
Conversely, if the sales proceeds do not fully cover the balance owing plus costs and fees, the lender has the right to sue the borrower for missing funds. This shortfall is no longer debt-secured by any property, so it becomes an unsecured claim.
What Is a Foreclosure?
On the other hand, in a foreclosure, the lender takes the title to the property, meaning they have complete legal ownership and rights over the property. This means that they can rent it out or sell it.
Compared to the power of sale, the foreclosure process is significantly longer and can take more than a year, compared to less than six months for a power of sale. Generally, the mortgagee does not begin the court process until several months of payments have been missed.
Since a foreclosure does not just give the lender the power of sale but the legal ownership of the property, they do not have the fiduciary duty to sell it for the highest price. The debtor also will not receive any money for equity or profits, but all proceeds remain with the lender.
Furthermore, the mortgage lender also loses their right to sue for any shortfall in a foreclosure.
Power of Sale vs Foreclosure: The Differences
With the Notice of Sale, the Statement of Claim and the Writ of Possession, both powers of sale and foreclosure share the same legal documents. However, the Statement of Claim will indicate which direction the processes will take, as it contains the chosen action.
It is crucial to know the critical differences between the two options:
Power of Sale | Foreclosure |
Lender obtains right to sell | Lender obtains legal title or ownership |
Can begin as soon as 15 days after the first missed payment | Usually begins after 3-6 months missed payments |
No court involved in Notice | Lender files suit in court & court issues demand for payment |
Redemption period (usually 35-40 days) during which you can bring the mortgage current | The redemption period is usually 30 days but can be extended |
Lender has a duty to sell for fair market value | No duty to sell for the highest price |
Equity or profit paid to the borrower | Equity or profit kept by the lender |
Lender can sue for a shortfall | Lender cannot sue for any shortfall |
Benefits of Speaking With a Licensed Insolvency Trustee
A Licensed Insolvency Trustee (LIT) can help you determine if there are options to avoid any action by your lender. If you are struggling with mounting debt and monthly payments of other unsecured debt, a consumer proposal could be an option to consolidate this debt in a consumer proposal to your creditors and reduce your monthly credit card or bill payments by using the equity in your home. You could use these freed-up finances to make future mortgage payments more affordable.
The experienced Licensed Insolvency Trustees of Chande Debt Solutions are focused on personal debt relief and insolvency services. We know that filing a consumer proposal or bankruptcy is a serious matter, and we want to ensure that you are well-informed and don’t rush into any solutions. All of our consultations are free, without time limits.
Call us today at 416-366-3328 or fill out our convenient online form to learn how we can help you recover financially.
