If a homeowner stops paying their mortgage and defaults on the loan, a power of sale by the lender allows the home to be sold to pay back the mortgage.
There are other ways for homeowners to default on a mortgage besides not making their mortgage payments. Mortgage agreements will have loan covenants, or obligations, that the homeowner must follow. This can include maintaining the property and paying their property taxes. Not fulfilling these covenants or obligations will mean that you are breaking the terms of your mortgage agreement, or defaulting on your mortgage.
The lender will demand that the homeowner repays the full amount of the outstanding mortgage balance. If they fail to do so, and the borrower has defaulted, a mortgage lender can either go through with a foreclosure or a power of sale depending on the province. Once a mortgage has been defaulted, the lender will try to sell the property to recover the money that they lent to you.
A power of sale is most common in Ontario, Prince Edward Island, New Brunswick, and Newfoundland and Labrador, while foreclosures are most common in the rest of Canada, including Quebec, British Columbia, and Alberta. Even though a power of sale can sometimes be generally referred to as a foreclosure, an actual power of sale differs in how the home is sold.
|Foreclosure||Power of Sale|
|Lengthy process||Quick process|
|The borrower does not receive any profits from the sale||The borrower can receive any profits from the sale|
|The borrower is no longer responsible for the remaining mortgage amount||The borrower is liable and can be sued for any costs or debt still left over after the sale|
|Quebec, British Columbia, Alberta, Manitoba, Saskatchewan, Nova Scotia, and the 3 territories||Ontario, PEI, New Brunswick, and Newfoundland and Labrador|
In a foreclosure, the mortgage lender will need to go to civil court to get an order of foreclosure. This is a lengthy process and usually results in the judgement being granted. The judgement in the order of foreclosure will order that the right and title of the homeowners in the mortgage will be foreclosed, with the mortgage lender now holding the title of the property. Now that the lender has taken possession of the home, the lender will then sell the home on the open market.
Since the lender owns the rights and title of the home, the lender will keep all of the money from the sale of the home. If the sale of the home did not cover the amount of the mortgage, the lender cannot go after the borrower for the difference.
The meaning of a power of sale is hinted at in its name, where the lender has the power to sell a property. Once the homeowner is evicted and the home is sold, the proceeds of the sale will be used to pay the outstanding mortgage balance, the cost of selling the home, such as legal fees and real estate commissions, and to pay off any other creditors with a lien on the property such as a second mortgage.
If there is any money left over, these excess funds will go to the homeowner. If the sale of the home did not cover the mortgage and selling costs, the mortgage lender can go after the homeowner for the difference.
Home buyers might think that a power of sale home would be a great deal, but in reality, lenders are required to sell the home at market value. This is because any leftover money from the sale would go to the borrower. Discounting the home to sell it quickly is not allowed if it is significantly below its fair market value. For example, a power of sale in Newfoundland and Labrador cannot sell the home for less than 75% of its appraised value without a court order.
Power of sale home buyers will also be purchasing the home “as-is”, which means that the buyer will take the home in its current condition. Repairs that the home buyer would need to do can add on costs to the home, and it’s likely that the borrower that defaulted on their mortgage might not have been able to afford to maintain their home.
The time that a lender has to wait before a power of sale after the mortgage is defaulted will vary based on the province. A notice of sale would need to be given to the borrower before a sale can take place, and the notice can only be given after a period of time has passed with the mortgage still in default.
|Province||When Can It Be Sold?|
|Ontario||45 Days after Notice|
|Prince Edward Island||Varies|
|New Brunswick||Two Weeks after Notice|
|Newfoundland and Labrador||Two Weeks after Notice|
In Ontario, the Mortgages Act says that the lender will have the power to sell the mortgaged property any time after three months of the default of the mortgage. The lender will also need to give a written notice to the homeowner at least 45 days before a sale can be made. This Notice of Sale can also only be given in writing any time after 15 days of the mortgage being defaulted.
Prince Edward Island's Real Property Act states that the lender cannot exercise a power of sale until a predetermined number of weeks after notice is given to the homeowner. This notice period length will be stated in the deed of conveyance. The notice can be given directly to the borrower, through mail, or by publishing it in a newspaper that is distributed in Prince Edward Island.
In New Brunswick, the Property Act states that the mortgage lender can only exercise the power of sale if they have given written notice to the borrower that the home would be sold, along with the time and place that is will be sold, and that this Notice of Sale is published for at least two consecutive weeks in a newspaper that is located within the county that the home is being sold.
Newfoundland and Labrador’s Conveyancing Act says that the mortgage lender will need to provide written notice to the borrower. After 30 days have passed after giving the written notice, and the mortgage is still in default, the lender can publish a Notice of Sale.
This notice must be published in a newspaper that is distributed in the area that the home is located, and the publication must remain for two consecutive weeks before the date of sale. The property cannot be sold for less than 75% of the appraised value of the home.
If you’re facing a power of sale, you will be given a notice period before your home is sold. If you can bring your mortgage back to good-standing by paying arrears or by fully paying off the mortgage, you can prevent the lender from selling your home. For example, Ontario power of sales can be cancelled if the borrower is able to pay the amounts owed through their Right of Redemption.
However, finding other lenders that are willing to let you borrow money to pay off your defaulted mortgage can be difficult.
Whether a power of sale is better than a foreclosure depends on the current market value of your home and the remaining amount of your mortgage. A foreclosure protects you from owing any further amount to your lender if your home’s value decreased significantly, but you won’t be able to gain anything if the value of your home increased instead.
For example, if a mortgage had an outstanding balance of $300,000 and the lender foreclosed the home and sold it for $200,000, the lender cannot sue the borrower for the remaining $100,000 still owed.
On the other hand, you can receive the excess money from the sale of your home with a power of sale, but you’ll also need to pay money if there is any shortfall. For example, let’s say that a homeowner defaults on a $300,000 mortgage on a home that is worth $400,000. The lender sells that home at market value and has to pay $30,000 in costs to sell the home, including legal fees and commissions. After paying the closing costs and mortgage, there is $70,000 left over. The homeowner will receive $70,000.
Homeowners facing a power of sale are not likely to receive any excess money, since mortgage defaults generally happen more often if the amount that they still owe on the mortgage is more than what the home is actually worth. If the homeowner has an underwater mortgage, such as if they have a $300,000 mortgage on a home worth $200,000, then the homeowner will not receive any money. Instead, the lender will sue the homeowner for the unpaid amount. In this case, the unpaid amount is $130,000, considering $30,000 in selling costs.