When a borrower does not make the agreed upon mortgage payments, their lender has the right to sell the property to reclaim their money. This legal process is called a power of sale and it is the most common remedy for lenders in Ontario who are looking to recoup their investment. This process was created in Ontario to be a superior alternative to the lengthy and resource intensive foreclosure process. The entire power of sale process takes around 6 months to complete, as opposed to over a year for the foreclosure process. In a power of sale, any profit from the sale of the home after all secured debts and fees are paid must go to the former homeowner. Letting the power of sale process complete itself is usually the worst option for the homeowner, as this typically results in massive fees that reduce any profit from the sale. The homeowner has different options for stopping the power of sale depending on when the power of sale started, the equity in property, the value of the property, and the location of the property.
Methods To Stop a Power of Sale in Ontario
Every method of stopping a power of sale involves paying the lender specific amounts of cash. The lender is legally permitted to request different amounts depending on if the mortgage term is expired and when the legal process was started. Once the initial Notice of Sale document is sent, if the mortgage term is not expired, the lender must accept payment of all arrears and fees. The value of arrears and fees is typically much lower than the full mortgage amount, and once paid the borrower may resume the mortgage normally. The payment of arrears and fees will only be accepted 35 days (40 days if the property is occupied by a married couple) after the Notice of Sale is sent. Once this period (referred to as the Redemption Period) is over, the lender can request repayment of the entire mortgage and can refuse to continue the mortgage with the borrower. Typically, the borrower does not have the cash on hand, and the following are the most common ways a borrower can raise the money they need:
- Place a new second mortgage on a property
The most straightforward way to get money to stop the power of sale is to place a second mortgage on the property. The money from the second mortgage should be enough to pay arrears and fees and bring the first mortgage back into good standing. In order to get a mortgage while in power of sale, you will need to seek out a private mortgage lender that focuses on high risk clients. Unlike traditional lenders, private lenders can overlook credit score and income, and instead will focus on the value of the property and the total value of debt secured against the property. Lenders will calculate a metric called a Loan to Value (LTV) ratio which is equal to the total value of debt secured against a property divided by its value. For an example home with total debts of $800,000 and an estimated selling price of $1,000,000, the LTV ratio will be 80%. Lenders will include the value of the proposed mortgage in the LTV calculation and will not approve the mortgage if the LTV ratio exceeds 80%.
A Loan-to-Value ratio for a property is equal to all mortgages on a property divided by the appraisal value of the property. If you own a home worth $1,000,000 and get a new first mortgage for $750,000 then your LTV ratio is 75% (i.e., 750,000/1,000,000)
Most banks and other A-Tier Lenders can loan up to 95% LTV provided that the borrower has a good income and credit score. Most non-bank lenders can lend up to 75% LTV but can overlook income and credit issues.
- Replace the mortgage with a new mortgage
If you’ve been turned down for a second mortgage, or if the lender is requesting the full mortgage amount, then you should try to replace the mortgage with a new one. The new mortgage amount needs to be enough to pay off the entire principal of the old mortgage plus arrears and fees. A private lender may be able to provide the mortgage, but the LTV ratio must not be in excess of 80%.
- Sell the property before the lender takes it
If every lender has turned you down for a mortgage, you can still try to sell the property before the lender takes the property. While it can be difficult to part with your home, selling the property may be the best option since it allows the homeowner to sidestep many of the power of sale fees. If a lender sells a property under power of sale, they can charge in excess of $30,000 in fees and this reduces the amount the former homeowner would get from the sale.
How a Mortgage Broker Can Help
Finding a lender who can lend to people in power of sale situations can be difficult, and our team specializes in finding lenders for people in power of sale. We have a network of private lenders across Ontario who can arrange mortgages for people up to 80% LTV. Our team can speak with you to understand where you are in the legal process, and outline the best method to stop your power of sale. Power of sale can be a very complex process depending on other financial issues a person may have, and there are many exceptions to the rules in a power of sale. Our team will thoroughly examine your paperwork and explain all the variables involved as well as the general timeline for the legal process.
Helpful FAQ Post
Can I Stop a Foreclosure?
A foreclosure is a legal remedy used by a lender to try to recoup their financial investment in a property. A foreclosure means that the lender is taking ownership of your property. The lender will assume all debts, liability and any equity in the house. If your property has a large amount of equity, you should take immediate action to try and stop the foreclosure. Learn more
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