If you default on your mortgage, the lender can go to court to take the property you mortgaged or sell it to pay the debt. This process is called “foreclosure”.
Understand your legal rights
A mortgage is a loan used to buy a home or other property. The lender, such as a bank or trust company, provides part of the purchase price of the property. The borrower promises to pay the lender back, plus interest.
Under the law in BC, a mortgage gives the lender a “charge” — meaning an interest or a right — against the property being purchased. That charge gives the lender rights if the borrower “defaults” on the mortgage. The most common way for a borrower to default is by not making payments under the mortgage as promised.
If you default on your mortgage, the lender has the right to “accelerate” (speed up) the mortgage. This allows the lender to claim the full balance owed under the mortgage, plus interest and other costs, even though the mortgage term hasn’t yet expired.
The lender can start legal proceedings to take the property or sell it to pay the mortgage debt. This legal process is called foreclosure.
Following a missed or late mortgage payment, you don’t automatically lose your home. Lenders don’t want to foreclose if they don’t have to, as it’s an expensive process and takes time. A lender will likely not start to foreclose until after two or three months of missed mortgage payments.
If you miss a mortgage payment, the lender will usually send a reminder letter. If they don’t hear from you or receive the missed payment, the lender will then follow up with a demand letter.
In fact, under the law, the lender must send you a demand letter before they can start legal proceedings to take your home.
The demand letter must say exactly what you owe. It must also say that:
- you have to pay a certain amount by a certain date to catch up on what you owe to “reinstate” your mortgage (restore it to good standing), or
- you have to pay the whole amount you borrowed (not just what you owe) plus interest and expenses to “redeem” your mortgage (pay it off).
Exploring options with the lender
If you have a short-term problem, like a temporary layoff from work, you may be able to negotiate with the lender. For example, you might offer to make smaller payments for a time, and add the amounts you fall behind to the total amount of your mortgage. Or, you might offer to make smaller payments for a while and a larger catch-up payment later. Most lenders would rather make some sort of deal and keep the mortgage in good standing, instead of starting foreclosure proceedings in court.
The law tries to help you if you have a good chance of paying what you owe and if you try to get your finances in order. Only in the worst cases are you likely to lose your home and any equity you’ve built up in it. Equity is the amount your home value exceeds your mortgage loan and any other debts registered against your home.
After a default, if you don’t reinstate the mortgage (by paying the amounts you owe) or redeem it (by paying the mortgage off fully) within the time set out in the demand letter, the lender can start foreclosure proceedings. Usually, this happens after you’ve missed three months of payments. But it can happen sooner.
If there’s a Supreme Court registry near where your home is located, the lender must start the proceedings there. You will receive a document called a “petition” for foreclosure. This is the lender’s notice to you they are bringing a legal action to get back the money they loaned you.
If you receive a petition for foreclosure
Get legal advice right away. If you want to protect yourself and take part in the court proceedings, you must file a response to the petition. You have to file this response within 21 days of getting the petition. You must file the response, together with supporting affidavits, at the court address shown on the petition. You must also deliver two copies of your response to the lender.
Once you take these steps, no one can take any steps in the foreclosure without notifying you. If you don’t file a response, the foreclosure will go ahead without you, and you won’t be able to protect yourself.
After you file the response, you will get a document called a notice of hearing. This sets the date of a court hearing where the lender will ask for an “order nisi”, the initial order in a foreclosure action.
At the first court hearing in a foreclosure action, the lender asks the court for an order nisi. This order sets the length of the “redemption period”, which is the time period during which you can redeem, or pay off, the mortgage. The order nisi also includes a personal judgment against you for the amount you owe.
Under the law in BC, the default redemption period is six months. However, the court can order that it be shortened or extended. One good reason to attend the court hearing is to ask the judge for as much time as possible to get the money to pay off the mortgage or sell the home.
During the redemption period, the lender (or another creditor) may ask the court for an order for “conduct of sale”. This order gives the creditor control over selling your home to cover what you owe.
You might be able to oppose the order by showing you have equity in the property or you are making efforts to sell the property yourself. You can argue that your efforts to sell the property are preferable, since creditors may be inclined to want to sell the property faster, at a lower price, than you would like.
If the court gives the lender or another creditor conduct of sale, you cannot sell the property yourself. But you may be able to oppose the approval of the sale. Court approval must be obtained for any sale. The creditor with conduct of sale presents a buyer’s offer at a court hearing. You may be able to argue the offer isn’t enough, and that more time should be allowed to get a better price. That said, where there is more than one offer, the property will almost certainly be sold.
During the redemption period, you have options, depending on your circumstances.
One option is to redeem the mortgage (pay it off). To get the money for this, you can try to borrow from another lender or a relative. You might seek a longer repayment period or a lower interest rate. Doing so could allow you to pay off the mortgage and lower your monthly payments. However, getting a loan in the amount needed may be difficult. Most lenders look at your income to decide whether to give you a mortgage and your income may be what caused you to fall behind in your mortgage payments in the first place, resulting in the foreclosure action.
Or you can try to sell the home. You could invite several real estate agents in your area to look through your home and tell you what they think it would sell for. Be honest with them about your situation, then choose the realtor you trust the most or feel most comfortable with. If you sell the home, you can use the money from the sale, first to pay any property tax you owe, and then to pay the mortgage and other charges registered against the title, including court costs. If there’s any money left over, you keep it. But if the money from selling your home doesn’t completely pay off all the lenders, you may have to pay them the difference.
The final order for foreclosure is called an “order absolute”. It comes after the redemption period ends. If the lender applies for an order absolute and the court grants it, the home then belongs to the lender and you must leave it. You lose all rights to the home.
If the lender gets an order absolute, and registers title in its own name, it cannot make any further claims against you. It can sell the home, but if the sale does not produce enough money to pay off the mortgage, you do not have to pay the difference.
Lenders do not usually ask the court for an order absolute. Instead, they more commonly ask the court for an order for conduct of sale, to sell your home to pay off the loan. If the money from selling your home doesn’t completely pay off the mortgage loan, the lender can attempt to collect the difference from you, relying on the personal judgment against you in the “order nisi”.
If you owe more than you can sell the home for, you will probably want to get out of the situation with as little expense and trouble as possible. However, you should still take action instead of ignoring the problem. You may want to work with the lender to minimize costs by agreeing to the foreclosure. Normally, you would only do this if the lender will give you a full release from your mortgage, meaning you won’t owe the lender any more money. If the lender won’t agree to this, you can simply let the foreclosure proceedings go ahead and use the time as a rent-free period to get your finances back in order. If any other people or companies with debts registered against your home are not paid from the money from selling your home in the foreclosure, you will still have to deal with them. Otherwise, they can sue you for any money you still owe them.
After foreclosure proceedings, any mortgages or charges registered before the lender’s mortgage continue and are still valid. However, any that were registered after the lender’s mortgage are cancelled. The holders of those charges lose their security. For example, if you have two mortgages on your home, and the first lender forecloses, the second lender will have to pay off the first lender or lose its security. Then the second lender would have to try to get you to pay its loss.
This information applies to British Columbia, Canada
Reviewed in October 2017
Time to read: 9 minutes