Buying and maintaining a house is a significant responsibility, especially in Toronto where the cost of living tends to be higher than elsewhere. Chances are, you knew what you were getting into at the time, but life can change faster than we realize.
What happens if you now struggle to keep up with your mortgage payments along with the rest of your bills? In this post, we’ll talk about Power of Sale (meaning when the bank forces the sale of your home.)
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What Is Power of Sale?
Power of Sale is the legal process mortgage lenders will use to recover their investment after a homeowner defaults on their mortgage payments. Though less severe than a foreclosure, it’s a situation to avoid at all costs.
A bank does not need permission from the courts to proceed since the Mortgages Act in Ontario allows for a Power of Sale. As frightening as it sounds, it’s still a complex and involved process. The bank generally uses it only when other paths have been exhausted. In addition, federally regulated banks are required to offer some level of support for homeowners who are struggling.
Real estate knowledge is always helpful before buying a home in Toronto. The posts below will help you understand today’s market:
- What Buyers and Sellers Should Know About Bank Appraisals
- Variable Versus Fixed Mortgages: What to Know When Rates Change
- Why Negotiating Skills Matter in West Toronto Real Estate
How Does Power Of Sale Work In Ontario?
Power of Sale is not something that happens overnight, nor does it generally take anyone by surprise. As a homeowner, you know when you’ve missed a payment or two. If the situation continues, the lender might begin the process.
- The lender sends a Notice of Default to give the borrower an opportunity to bring their account back into good standing.
- If the homeowner continues to fall behind, the lender then issues a formal “Notice of Sale” informing the buyer of an upcoming sale to recover the funds.
- The borrower will now have a redemption period, usually 35 days in Ontario. If the homeowner can cover their outstanding arrears, the Power of Sale stops, hopefully with your credit rating still intact. (Just be aware that even the initiation of Power of Sale can lower your score, so once again, it’s best to avoid it whenever possible.)
If the homeowner is still unable (or unwilling) to catch up on their payments, the lender can move ahead with the sale. They are under a fiduciary duty to sell the home at fair market value so as not to shortchange the borrower.
After the sale, the lender will recoup their investment, along with interest charges and any costs associated with the transaction. If there is still a deficiency, the borrower will need to cover the remaining funds. The one piece of good news is that any surplus stays with the homeowner.
Power of Sale Vs Foreclosure
What is the difference between foreclosure and Power of Sale? Both protect the lender from financial losses when a borrower defaults on the loan. Though neither is ideal, a Power of Sale is preferable because you maintain ownership of the home until the new buyer takes possession.
Foreclosure can seem more punitive since ownership of the title is transferred to the lender. If the home later sells at a profit, the borrower receives none of the proceeds. Unlike a Power of Sale, however, the lender needs approval from the courts to pursue a foreclosure. Fortunately for the borrower, that makes foreclosure even more rare in Ontario.
Under Power of Sale, the homeowner retains certain rights that they don’t get during foreclosure, including the right to stop the sale by repaying the loan and access to surplus funds from the transaction.
To avoid either Power of Sale or foreclosure, we recommend reaching out to your lender before they contact you. Keep in mind that the bank does not want ownership of your home or to go through either process. By being proactive, you may be able to work out a more affordable repayment structure. At the very least, you can decide to list and sell your house on your terms.
When you are counting on stellar results from your home sale, the tips below can help:
- 5 Common Mistakes Home Sellers Make
- What Every Seller Should Know About Home Inspections
- What Are My Closing Costs When Selling a House in Ontario?
How to Buy Power of Sale in Ontario
There is a flip side to the conversation about Power of Sale. In some cases, it can represent an opportunity for buyers who are searching for a deal on a house in Toronto. Though the bank has an obligation to sell the house at fair value, they are only concerned with recovering their investment rather than earning “top dollar.”
In a busy market, this could be your chance to buy a house without getting into multiple offer scenarios or bidding wars. There could also be a much faster closing date than with a standard transaction.
As with all purchases, it’s important to know the risks. One of the most significant drawbacks of a Power of Sale home is most properties are sold as-is, and the lender will not have detailed information on their condition or if there are latent defects.
The burden of due diligence is entirely on the buyer. The transaction can also fall through at the last minute since the current owner has the right of redemption right up until the official closing date. If they are able to come up with the funds, your accepted offer can be terminated with very little notice.
If you’re ready to shoulder the risks, a local real estate agent can show you how to find and navigate any opportunities in the current market.
Are you planning to buy or sell a home in the near future? Our West Toronto real estate agents are here to guide you with expert advice in today’s market. Reach out today at 416-769-3437 or email info@sidorovainwood.com with any questions.
