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How Mortgage Foreclosure Works

Foreclosure is one of the main risks associated with mortgages. Failure to pay your mortgage exposes you to a lawsuit by the lender, after which they can take the title deed.

The process of taking complete ownership of the property after loan default is a foreclosure of a mortgage – the homeowner gives up all the rights to the lender, including possible equity value. If the foreclosure goes through, the lender can do anything they like with the property, including selling or renting it. Most choose the sale option, and you will not have the power to stop the transactions.

So, how do you foreclose on a mortgage in Canada?
Mortgage foreclosure in Canada is a lengthy process that involves the court. The lender initiates it by taking the homeowner to court and filing a Statement of Claim. The borrower gets approximately 20 days to respond or create a defense, after which the mortgage is declared a default.

The lender can ask for a foreclosure order as a remedy, but the court will rule according to your financial status or chances of catching up on the payment. You could get a Redemption Order stipulating the duration you have to catch up with the loan payments. Most people get six months, but you can always ask for an extension. The lender might ask for a shorter time, meaning the arrangement may not work for you, but it is still worthwhile since the court might rule in your favour.

Apart from being lengthy, mortgage foreclosure in Ontario is also costly. Both parties – the lender and homeowner – can spend a lot of money without getting a favourable outcome. That is why you should strive to stop the proceedings by catching up on payments or paying a lumpsum before the case advances.

Do foreclosures happen in Canada?
Remember, the lender wants to win as much as you do. Even the courts do not take pleasure in making you homeless. The goal is for the lender to get back their money. That is why the court can use any avenue that ensures you both win – you stay in your home, and the lender gets paid. Most mortgage brokers Toronto also maintain leniency and would choose any option that allows them to get their money back over the foreclosure Toronto process.

You can craft a suitable arrangement with the lender to avoid foreclosure. Explore all the possible options, including bankruptcy.

Difference Between Foreclosure and Power Sale


Foreclosure in Canada is rare because of the duration and costs the process requires to give a lender complete control over a borrower’s property. The creditor gets all the benefits from the property, such as equity value, but they lose the right to recover any shortfall through a lawsuit. They only pocket the proceeds from the sales. If they get less than they gave after selling the house, they accept the loss and cannot ask you to pay the difference.

The inability to ask for the difference in the loss and the extensive and costly court process is why bank foreclosure is rare in Canada. Homeowners do not like to lose the home equity value, a likely outcome during a foreclosure. They would rather pay the mortgage before the court ruling.

Exploring various payment options is advisable as a better option than taking chances with the foreclosure and losing the property.

Power of Sale

Power of Sale is more common in Canada because of the less strenuous legal process involved, unlike foreclosure. It is a form of foreclosure where the lender seeks permission from the court to evict you before selling the house. It does not require them to get the title deed before initiating the sale, meaning you get a better chance of keeping the house but at a higher cost. The lender does not own the property; they only get the power to sell.

The creditor initiates the action if you default on the payment for more than 15 days, no matter the reason. You can contact the creditor to negotiate for more time if you can pay the loan before commencing the power of sale process.

Power of sale vs. foreclosure Ontario has different potential outcomes for the homeowner. The lender keeps the proceeds from the property sale during a foreclosure, but the homeowner receives the excess amount after catering to the mortgage and associated costs.

Can Bankruptcy Prevent Foreclosure?

Bankruptcy is not a solution to foreclosure because it does not involve secured debt – it cannot stop the legal process once it starts. It can save you from other debt-related issues, allowing you to increase the cash flow and catch up on loan payments.

So, why is bankruptcy a good debtor's defense against foreclosure?

Filing for bankruptcy can prevent you from losing your home – Canadian law protects you. However, the rules also stipulate that a mortgage lender cannot cancel the debt if the borrower files for bankruptcy.

Non-exempt equity is the main factor in bankruptcy proceedings and differs in every region. Ontario requires you to pay the Licensed Insolvency Trustee an equivalent amount to home equity if it is more than $10,000.

You should also note that declaring bankruptcy gives you an unsecured debt as the difference between the property value and mortgage balance – the amount does not have enough collateral to cover it. Giving up the property in bankruptcy means you will not have to pay the difference between the value and the property's worth. However, the general mortgage insurer can come after you if the shortfall is in an insured mortgage.

So, how do I stop foreclosure in Canada?

There are alternatives to bankruptcy, such as asking the lender for an extension, renegotiating the mortgage terms, selling the property before the commencement of the foreclosure, or getting a new loan from a different lender.

What Are the Other Options to Prevent Foreclosure?

Voluntarily Surrender the Property to the Bank

Sometimes, the desire to own a home can get in the way of reality, causing you to buy a home you cannot afford. Walking away can be a better solution if the property value reduces below the mortgage balance. You can give the property to the bank before the lender initiates the foreclosure process or when you realize you cannot afford the mortgage. The bank can file an unsecured claim in your bankruptcy.

Renegotiate the Terms of Your Mortgage

Most lenders are open to renegotiating loan terms, giving you leeway for an extension and better planning. For instance, you can ask for a 30-year amortization if you have a 17 ½ – year one. The restructuring can allow you to combine all the debts in the new mortgage. The extended repayment period also means lower payments. The best part is that you will not have arrears.

Try to Sell the House on Your Own Before the Bank Forecloses on it

You can always put the property on the market before losing the title deed to the creditor in foreclosure. Such a move has two significant advantages. You can negotiate a higher price since you have more to lose than the creditor or get an opportunity to capitalize on the equity you may have acquired, meaning you can retain the capital gains for your benefit. Either option works for your benefit.

File a Consumer Proposal and Still Retain Ownership of Your Home

A consumer proposal involves Licensed Insolvency Trustees who negotiate on your behalf and can pay a portion of the debt or give you more time to finish the mortgage. Sometimes they strike a deal that allows both. That solution is more critical when multiple debts hinder you from maintaining the mortgage payments. The proposal can tackle the finances to make repayments. more sustainable, but only if done before the foreclosure.

Search for a Different Lender

Your lender refusing to negotiate is a possibility. You can calculate the payout amount, then find a new lender willing to give you a new mortgage. Remember, due diligence is vital before signing a contract with a new lender. Private loans tend to have higher interest rates to cover the additional risk creditors take. You can also get a better refinancing deal if the property has higher equity.

Request a Deferment of Payment

Lenders allow payment deferment under specific circumstances. Many homeowners used the foreclosure avoidance option during the pandemic when lenders were willing, but you can discuss the alternative with your creditor at any time. Be open to short-term deferrals as many lenders will not be ready to give long-term reprieve. That can still provide time to catch up on your mortgages and plan your finances accordingly to avoid financial burdens in the future.

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Foreclosure Mortgage in Canada – FAQs

Does Foreclosure Always Affect Credit Score?

Foreclosures were not a risk to credit ratings initially because mortgages were not reported to the credit bureaus, but that is no longer happening.

Mortgages are reported nowadays, creating room for foreclosures to interfere with the credit score. Recovering a perfect score will take years, especially if the lender sues you successfully.

The best way is to avoid situations where the lender sues to reclaim their money. A damaged credit score takes years to repair.

What happens if my bank is trying to foreclose my rental property?

Foreclosures on rental properties are similar to the processes you encounter in your home. The court will ask the tenants to vacate, issuing them with an order. That comes after ascertaining that you are the owner and cannot maintain the payments as agreed on with the lender. The tenants usually get one month or 30 days to comply with the order.

What is a “rolling late”?

Understanding rolling late requires differentiating between skipping and missing mortgage payments.

Skipping a payment is when you miss a one-month payment and resume the next one. Doing so does not put you back on schedule – it only means you skipped the missed payment, and the next installment serves as an installment for the month you missed.

You can double the payments to cater to the missed one to get out of the “rolling late” state. Before then, every payment you make will be considered a late installment to cover the previous month. The longer you remain in that state, the more you accrue late payment fees. You eventually damage your credit history and score.

You can get out of the “rolling late” state by paying the missed month sooner and keeping up with payments subsequently. The more you miss payments, the more financial trouble you can get into.

For How Long a Foreclosure Will Affect Your Credit

Improving your credit score takes time and effort, especially once damaged by foreclosure proceedings. Most homeowners wait at least seven years for the score to get to a point where it does not reflect on the foreclosure. Sometimes it takes up to ten years.

That only highlights the importance of avoiding foreclosures further. It is undoubtedly one of the most stressful situations you can face, causing a lasting dent in your credit rating. Luckily, it is also avoidable.

How Many Mortgage Payments Can You Miss Before Repossession?

The lengthy nature of foreclosure means you get enough time to weigh other options and mitigate the process. The lender does not begin the process immediately if you miss the payment. The creditor will notify you through a letter before starting the process.

The first notification comes 30 days, followed by 60 and 90-day durations. Foreclosure begins when you fail to respond after 90 days.

What Should You Do if You Already Missed a Mortgage Payment?

Communicating with the lender is critical in exploring mortgage repayment options. The sooner you open up to the creditor, the higher your chances of keeping your home. You are more likely to find a befitting solution that allows you to keep your home and continue enjoying affordable mortgage payments. Most lenders are always willing to work with homeowners if it means recovering all their money.

You can also consult a lawyer or mortgage broker if your financial situation changes suddenly and prevents you from keeping up with the regular payments. Their professional advice can help you determine how to sustain an affordable payment schedule before the situation worsens. Remember, bankruptcy or foreclosure should be the last resort. They can have lasting consequences on your finances and should only be a viable alternative in the worst-case scenario.

If foreclosure becomes a threat, sell the property instead. You stand a better chance of profiting from the sale and maintaining a good credit rating.

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