What Happens When a Mortgage Goes Bad?


With so much media attention to the housing market and mortgage lending, I wanted to share what happens in Ontario when a lender needs to start enforcement action. Each province has a different set of rules and regulations.

Enforcement actions are normally the last resort for a lender. So if there is equity in the property the borrowers should see all options to refinance. There are many private lenders who can help with short-term solutions.

In Ontario, the Power of Sale process is a legal process that allows a mortgage lender to sell a property in order to recover the outstanding mortgage balance owed by the borrower. This process is governed by the Mortgages Act of Ontario and typically begins when a borrower defaults on their mortgage payments. However, other reasons for default can arise.

Under the Power of Sale process, the lender (also known as the mortgagee) has the power to sell the property with very little involvement of the court system, as long as they follow the proper legal procedures. The lender must provide the borrower with notice of the default and give them an opportunity to remedy the situation by paying the outstanding mortgage balance and any associated fees or cure the non-monetary default in rare circumstances.

If the borrower does not cure the default and pay the associated costs within the specified time frame, the lender can then sell the property through a public auction or sale. The proceeds from the sale are first used to pay off any outstanding mortgage balance, legal fees, and other associated costs. Any remaining funds are then paid first to any subsequent mortgagees, or other known debts, and if after all payments are made there are excess funds, they will be returned to the borrower. If there is a shortfall in payment the lender has the right to pursue the borrower. Most mortgagees will sue the borrower on the covenant to pay the debt before selling the house, just in case there is a shortfall.

It is important to note that the Power of Sale process is different from a Judicial Sale, which is a court-administered process that results in the sale of a property to repay a defaulted mortgage. In Ontario, the Power of Sale process is generally faster and less expensive than a Judicial Sale.

Another remedy available to a mortgagee is foreclosure. This is when title to the property is taken by the mortgagee in exchange for the debt. This process also goes through the courts. It is relatively rare in Ontario, since there is a risk that a borrower will seek to convert the foreclosure into a judicial sale.

The timeline for a Power of Sale process in Ontario can vary depending on a number of factors, including the specific terms of the mortgage agreement, the borrower’s response to the default notice, and the efficiency of the sale process. However, there are certain general timelines that are commonly followed in Ontario.

Once a borrower has defaulted on their mortgage payments, the lender will typically issue a Notice of Sale to the borrower, giving them at least 35 days to pay the outstanding balance and avoid the Power of Sale process. If the borrower does not pay within this time frame, the lender can proceed with the Power of Sale process.

The next step is for the lender to issue a Statement of Claim, a legal document starting an action in which the lender sues the borrower on the covenant to pay, and seeks possession from the court. The Statement of Claim is filed with the court, and the borrower has 20 days to respond. If the borrower does not respond, the court may grant a default judgment in favour of the lender.

It is possible to run the statement claim and notice of sale at the same time for time efficiency.
Once the lender has obtained possession of the property, they can then appraise, and list the property for sale. The property must be marketed and the sale must be conducted in a fair and reasonable manner.

Overall, the Power of Sale process can be a useful tool for mortgage lenders to recover their outstanding balances in the event of a borrower default. However, it is important for borrowers to understand their rights and obligations under this process, and to seek legal advice if they are facing a potential Power of Sale situation.

Chad Robinson

About The Author

Chad Robinson, President of Align Mortgage Corporation and IQ Lend Inc., is a licensed mortgage and real estate broker with 25 years of experience. Specializing in commercial development, Chad has successfully led numerous construction projects in Ottawa and continues to inspire as a consultant for private lenders and developers. Hosting “The Practical Broker” podcast, Chad excels in guiding first-time investors and contributing to esteemed real estate periodicals. Recognized with prestigious awards and featured on various media outlets, Chad’s expertise is unmatched. With a bachelor’s degree in economics, he approaches each mortgage request with personalized attention, making him a standout among mortgage professionals.