Answering Your Questions About Mortgage Default

COVID-19 is changing things at a rapid pace. The rate of increase in unemployment is unprecedented, with 1 million Canadians having applied for UI in just one week in March. Without work, Canadians are concerned about how to pay their bills. Over 710,000 Canadians had requested mortgage deferrals as of April 24 so I wanted to take a closer look at mortgage default management, foreclosure and power of sale for today’s topic.

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Help Paying Your Mortgage

According to Stats Can, more than one million Canadians lost their jobs in March with 2.1 million more Canadians working less than half their normal hours or not at all. The April numbers will doubtless look equally grim. With the COVID-19 pandemic causing massive unemployment, more and more Canadians are looking for help paying their mortgage.

The federal government has pledged to help Canadians through the crisis. In other posts I’ve discussed the programs for individuals and businesses intended to supplement lost income. In addition, the Bank of Canada has taken swift action to cut interest rates and the Canadian Mortgage and Housing Corporation (CMHC) has announced plans to buy back $150 billion in insured mortgages to free up the banks liquidity. With the backing of CMHC and the other two mortgage insurers, the Banks are able to offer customers some credit relief.

The CMHC website recommends that, if you suspect you might not be able to make a mortgage payment, you get in touch with your lender right away to work out a plan. (Keep in mind that I’m a realtor, not a mortgage expert. Much of this information is based on research I’ve done and shouldn’t be construed as legal advice). If your situation is tied to the impact of COVID-19 and your credit was otherwise in good standing, you are a likely candidate for relief measures. Some of the options include:

• using the built-in skip-a-payment feature that most mortgages offer,
• accessing your homes equity with a HELOC and borrowing from it,
• obtaining approval for a short term mortgage payment deferral of three or six months,
• extending the mortgage amortization period to lower monthly payments,
• adding missed mortgage payments to the balance to be spread over the term,
• locking in at a favourable fixed interest rate.

Bear in mind that none of these options are “debt forgiveness” – you will still be paying the debt back, just with a different payment plan that is back-end loaded to lighten up payments in the short term.

What If I Still Can't Pay My Mortgage?

Now, for the question on most peoples’ minds. What if this COVID-19 situation drags on and I’m out of work for months? What happens if I can’t make mortgage payments and I’m out of relief options? Doubtless lots of people will be in the same boat and I’m sure the government will continue to introduce supports and measures to help out. That said, here’s what mortgage default looks like.

Although lenders typically won’t begin foreclosure after just one mortgage payment is missed, they are entitled to do so. For the most part, lenders would rather work things out without having to go to the extreme of foreclosure. Foreclosure basically means taking over possession of the mortgaged property for failure of payment.

Power of Sale Process

In Ontario, foreclosure is actually power of sale, a process that requires less legal involvement than a formal judicial foreclosure.

If you have defaulted on your payment for 15 days, the lender can send you a notice of sale under mortgage as a first step. The notice starts the clock on a 35-day redemption period during which the lender can take no further action and the homeowner can catch up on missed payments.

Once the notice period ends and the debt has still not been settled, the lender can send a Statement of Claim for Debt and Possession of the property. At this point the homeowner must file a Statement of Defense in court if they hope to remedy the situation – failure to do this will result in an automatic ruling in the lender’s favour.

Either way, the court can decide in favour of the lender, awarding them a Writ of Possession, which allows the lender to evict the homeowner and sell the property to recoup the mortgage debt.

Depending on the market at the time and the eventual selling price, the homeowner may receive any surplus money once the debt and legal fees are paid, or may still be held responsible for an outstanding balance not covered by the sale.

Again, it’s worth noting that foreclosure isn’t in anyone’s best interest – not the homeowner, nor the lender. If you are proactive about communicating with the lender when you first encounter difficulty making mortgage payments, they are likely to try to help you rather than go through the legal hassle of foreclosure.

According to the Canadian Bankers Association, less than .25% of Canadian mortgages were in arrears at the end of December 2019. The last time the defaulted mortgage rate topped 1% was during the 1996 economic downturn. Hopefully with government intervention and a quick end to the COVID-19 pandemic we won’t get to 1% again any time soon.

Another Option

Many homeowners choose to try and sell their homes themselves rather than risking foreclosure, where they will lose their home and may still end up owing money to the lender. If this is an option you are considering, please feel free to give me a call at 905-822-6900 for a confidential and no-obligation discussion about selling your home.

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