If you take out a mortgage through a bank or alternative lender in many Canadian provinces, your lender has the right to invoke power of sale, even if the clause does not explicitly appear in your mortgage paperwork. When applying for a property loan, it’s important to understand power of sale, and what options you have if you find yourself unable to keep up with your loan payments.
What is Power of Sale?
Power of sale is an alternative to foreclosure that’s often used by Canadian lenders in Ontario, New Brunswick, PEI, and Newfoundland. A power of sale clause gives lenders the right to sell the mortgaged property in the event that the borrower defaults on the agreed-upon payment structure.
The power of sale process usually follows these steps:
- You miss or default on multiple payments
- The lender serves you a notice of sale
- If you are still unable to pay, the lender seizes the property and sells it
- After the sale, the lender recoups costs equal to the money you owed, and any surplus is paid back to you
Notice of sale documents are sent out 15 days after a missed payment. When the lender sends you a notice of sale, this means that they are already in the process of exercising the power of sale. After you receive this notice, you have a 35-day redemption period in which you can pay back the money you owe and stop the lender from selling your property.
What’s the Difference Between Power of Sale and Foreclosure?
Power of sale is a cheaper and faster process than foreclosure. Though both are legal proceedings, the main difference between power of sale and foreclosure is that in foreclosure, the lender must go through a formal court proceeding to take control of the property, while in power of sale this is not required.
For this reason, foreclosure is a much longer and more arduous process than power of sale. The power of sale process can be over in a few weeks, while a foreclosure often takes months to resolve.
In a foreclosure, the lender takes everything — even if the sale price of the property amounts to more than the outstanding amount of mortgage debt. With power of sale, any surplus profits are repaid to you, the borrower, after the property is sold.
Can a Homeowner Stop a Power of Sale?
The only way to stop a power of sale is to pay your lender what you owe them. It’s important to make sure that if you miss a payment or run into financial difficulties, you communicate with your lender and discuss potential resolutions before you get too behind on your payments.
Depending on the amount of the loan, you might be able to work out an arrears payment plan within the 35-day period between the notice of sale and when the lender is set to take possession of your property. In some cases, you might be able to work out an alternative payment structure with your lender, especially if your financial difficulties are only temporary.
Keep in mind that the lender has the right to add interest or late fees to your existing amounts owed if you default on a payment.
If you do need to take out a second mortgage or loan to help stop power of sale, you’ll probably need to do so through an alternative lender in Ontario. Look for a lender that is experienced in helping homeowners avoid power of sale.
Purchasing a Power of Sale House
Since power of sale happens outside of the courts, lenders are not obligated to disclose to potential buyers that the home they are selling is being sold under power of sale. Power of sale properties are sold on the open market like any other property. This means that power of sale homes can be hard to identify.
When a property is being sold via power of sale, the lender will often have the home appraised by professionals to assess the property’s true value. The true value of a home may differ slightly from the market value. It’s in the lender’s best interest to offer the home at a good price, so that it sells quickly, and the debt doesn’t continue to compound. However, it’s also up to the lenders to make sure that the sale price covers the full amount of the debt, ideally with some profit left over for the borrower, so don’t expect any steep discounts on power of sale homes.
If you are looking to buy a power of sale house, a better purchasing option may be a sheriff’s land sale. A sheriff’s land sale, or sheriff’s sale of land, usually occurs when someone fails to pay property taxes on a house over an extended period of time. In Ontario, sheriff’s land sale properties are put up for public auction, and bidding may start at a more competitive price.
Power of sale is designed to make lending less risky for banks and alternative mortgage brokers in Canada. It’s a good idea to discuss power of sale conditions with your lender before you agree to a loan or mortgage. If you do run into unexpected financial issues and need to take out a second mortgage, look for a reputable alternative lender with experience in power of sale mortgages.