What is a power of sale and how you can avoid it

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Power of sale is a dreaded term for most homeowners.  A power of sale virtually grants a mortgage lender the authority to take possession of the property and sell it off in the event that you default on your mortgage payments.  It is a standard part of most mortgage agreements that you sign at the branch or at the lawyer’s office when you get your mortgage.  Power of sale is the remedy used in 90+% of cases of mortgage default in Ontario.

First of all, it's important to know that the power of sale is not something that just happens out of the blue. The bank or lender will always give the homeowner a chance to catch up on their payments and avoid the power of sale. This usually means sending them letters and calling them to try and work out a plan.  A power of sale is a last resort measure that is part of a mortgage contract you sign.

Many banks and mortgage insurers have recently announced special provisions to increase mortgage amortization periods, thus lowering the monthly payment.  This may be one of the options you can negotiate with your lender.

If you still can't make their payments, the bank or lender will start the power of sale process. This means that they'll hire a lawyer who will send the homeowner a "notice of sale," which indicates that the power of sale is happening and when the house will be sold.

First step: Notice of Sale

A notice of sale is the first part of the power of sale process and will be served 15 days following default, or a missed mortgage payment.  It is important to address things with your lender, as soon as you miss a mortgage payment, even before you are served with a notice of sale.  Lenders are usually willing to work with a homeowner who has fallen behind on mortgage payments. This is because a power of sale process takes time and is quite complicated.  Remember that your lender is in the business of lending money, not owning properties.  It is in their best interest to help you, within reason.

Depending on the equity you have in your home, you may have the option to refinance your property with another lender and pay off your initial mortgage, or in some situations, arrange a second mortgage to pay off the first mortgage.  A new mortgage may allow you to reduce your monthly payments through a longer amortization process.

Similarly, you may be able to have the opportunity to sell your house prior to a power of sale and use the proceeds from the sale to pay off your mortgage balance.

Second Step: Starting the Power of Sale Process

If none of the above solutions work,  you then have 35 days to pay all defaulted amounts (known as redemption) and that will stop the power of sale process.  Your lender cannot do anything further for those 35 days, but if you fail to remedy the default in your mortgage, your lender can then exercise their Power of Sale rights and escalate things to the next step.

Third Step: Statement of Claim and Statement of Defence

Once your lender has started exercising their power of sale rights, you will receive a statement of claim, which is effectively your lender’s way of suing you for non-payment of your mortgage.  After receiving a statement of claim, you’ll have 20 days to file a statement of defence response in court.  Not filing a response in court will lead to a default judgment and award a writ of possession to your lender.  

However, if you do choose to file a defence, you’ll need to be aware that enforcement of security for non-payment is the right of the lender.  A successful defence will have to prove that there are some real issues with your lender.

Step 4: Court judgment to evict

Once your case goes to court, if the court decides against you, the lender can activate the eviction process by applying for a writ of Seizure and Sale, an order for Possession, and a Writ of Possession.  Sadly, this is where you will be physically evicted from your own home and your property will be listed for sale.

Step 5: Property is sold under power of sale

Once the eviction process is completed, your lender will list your house for sale under the power of sale and use the proceeds from the sale to pay off the debt.

If the final selling price is greater than the amount you owed on the house, you will receive the balance; after fees such as real estate commissions and legal fees have been covered.  If they do not sell the house for enough money to cover the outstanding mortgage debt and fees, the lender will still hold you responsible to cover that balance.

The bottom line

In conclusion, the power of sale is a legal process that allows a lender to sell a property in order to get back the money that is owed to them. It is important for borrowers to understand their rights and responsibilities and seek options to avoid a power of sale by working closely with their lenders and other financial professionals.

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