What happens if you can’t pay for the mortgage?
Not being able to meet your mortgage payments in full and on time can have serious consequences including penalty fees, default and even foreclosure. It is important to be aware of these consequences before taking on a mortgage.
If you cannot make your mortgage payments:
You may have to pay late charges
You will damage your credit rating. Having a poor credit rating will make it difficult for you to obtain loans and make certain purchases in the future
Your mortgage may go into default and your mortgage lender may sell your home through Power of Sale to cover your debt, or become the owner through foreclosure.
If through Power of Sale the lender has the right to sell the property to recover the money still owed on the mortgage. Depending on the circumstances, you may never get the home back. If the lender sells the home for a price that is more than what is left on the mortgage, extra money is given back to the homeowner. In the case of a shortfall, the owner will have to pay the difference. Also, it will be harder in the future to find a lender that will offer you another mortgage.
If through foreclosure the lender gets a court order to take over the property. If this happens, all of the previous mortgage payments you have already made, all the money you have invested into the home and any equity (value beyond what is owed on the mortgage) in the home is lost.
Please read on:
Provided a homeowner has sufficient equity in their home, there are remedies available when a property is under a Power of Sale legal action. The first mortgage can possibly be refinanced with another lender, OR more commonly a second mortgage is registered against the property. In some cases it is the second mortgage previously registered on title that will need to be refinanced. The funds from the first/second mortgage refinancing are used to bring the mortgage security in default current and up to date (including any property tax arrears) therefore allowing the homeowner to maintain possession of the property.
To follow is a general explanation of the Power of Sale process. Please call Rob Munn B. Sc. (broker) 416 410.4740 to discuss your situation and available options.
A mortgage is a legal contract that sets out the security for the loan (mortgage) and the repayment terms. The vast majority of mortgages contain various terms which allow the Lender to collect or recoup the money lent should the Borrower not pay, most commonly being Power of Sale. The Foreclosure process is far less common in Ontario.
Power of Sale is a standard clause allowing the Mortgagee (the “Lender”) to sell the mortgaged property if there is a default. If the sale proceeds are less than the mortgage debt, Power of Sale clauses also allow the Lender the right to pursue the Mortgagor (the “Borrower”) for any deficiency. Likewise, after deducting expenses and incidental costs to enforce its mortgage (including legal fees), if the sale produces a surplus, the Lender must return those funds to whomever it is due, whether that be another creditor who has staked a claim to the proceeds through a lien or an execution registered on title, or to the Borrower.
If there are other parties with a monetary interest in the property, whether it be other encumbrances, (subsequent Lenders) or the Borrower, the Lender has a duty to obtain the best price available for the property. This does not mean that the Lender has to get the absolute best price that the Market will bring, but the best price considering that this is a forced sale. Failure to obtain the best price in the circumstances could leave the Lender open to a legal action for an improvident sale, either by the Borrower or subsequent encumbrances. Other options such as Foreclosure and Suing for Possession do exist and are still available to the Lender if they so choose. However, those options are more cumbersome and time consuming as they involve Issuing a Statement of Claim and using the formal court system. Power of Sale is considered a “self help” remedy that does not involve extensive use of the court system unless the defaulting owner refuses to vacate the premises. If the defaulting owner refuses to vacate the premises then a Statement of Claim will need to be issued to get an Order for Possession. Foreclosure can take one to two years to complete.
The actual Power of Sale process is as follows:
- Once a mortgage is at least 15 days in default, the Lender can issue a Notice of Sale Under Mortgage.
- The Notice of Sale contains a redemption date of not less than 40 days. Coupled with the requirement of a day to issue the notice of sale and one day at the end of the notice period, the minimum amount of time for this portion of the process is 45 days. Most lawyers issuing a notice of sale under mortgage provide 40-45 days, as part of their due diligence, since any miscalculation of time voids the entire process and leads to the power of sale having to be recommenced.
The Borrower has the right to bring the mortgage in good standing i.e. arrears plus costs. If the Borrower pays the monies required under the Notice of Sale, prior to the end of the redemption date, the Notice of Sale is voided. If the Borrower does not pay, the process moves to the next step.
- If the period of time noted above expires and the mortgage has not been remedied by the Borrower, the Lender can issue a Statement of Claim in the Superior Court of Justice, which will basically request possession of the property and ask the court to allow the property to be sold to satisfy the debt owing.
- The Borrower has 20 days from receiving the Statement of Claim to issue a Defence, or 30 days if they issue a Notice of Intent to Defend.
- If no Defence is filed, the Lender can obtain a Default Judgment. If a Defence is filed the Lender will often bring a motion for Summary Judgment, as there are few Defences available to a default on a mortgage. In either event, Judgment is usually obtained in short order.
- The Lender will use the Judgment to issue a Writ of Possession with the court, and to file same with the Sheriff. The Sheriff will then ensure that the Borrower is evicted from the property so that it can be sold.
While the procedure appears to be straightforward, if the Lender or its Lawyer makes a mistake in any of the steps the process will have to be restarted from the first step. This ensures accuracy on the part of the Lender so the Borrower knows exactly where he/she/they stand if they want to redeem or put the Mortgage back in good standing.