Power of Sale vs. Foreclosure: What Every Homeowner and Buyer Should Know

Power of Sale vs. Foreclosure: What Every Homeowner
and Buyer Should Know
When a homeowner falls behind on mortgage payments, lenders in Ontario have two main legal
options to recover their funds — Power of Sale or Foreclosure. While both processes allow the
lender to sell the property, they differ significantly in speed, ownership transfer, and financial
outcome.
In Ontario, 95% of the time, lenders choose the Power of Sale process rather than
foreclosure — and for good reason. Let’s explore why.

What Is a Power of Sale?
A Power of Sale allows the lender to sell the property without becoming the owner on title.
This process is generally faster, more efficient, and less costly than foreclosure, enabling the
lender to recover their money quickly.
How the Power of Sale Process Works:
1. 10-Day Demand Letter
The process begins with a 10-day demand letter sent to the borrower, giving them a
final chance to bring the mortgage back into good standing.
2. Occupancy Check
If there’s no response, the lender investigates who’s occupying the property — the
borrower, their spouse, or a tenant — and whether the property is vacant.
3. Title and Creditor Searches
The lender’s lawyer conducts searches to determine if there are any other mortgages,
liens, or registered judgments against the property. All relevant parties will be notified
of the default.
4. Notice of Sale or Notice of Default
After at least 15 days of non-payment, the lender can issue a Notice of Sale (or
Notice of Default). This notice is also sent to every other registered mortgage holder.
5. 35-Day Waiting Period
Once the Notice of Sale is issued, there’s a 35-day period during which the borrower
can pay the arrears and stop the process.

6. Listing and Sale
If the borrower doesn’t pay, the lender can list the property for sale. A court order for
possession may also be sought if the property is occupied and access is needed for
showings.
○ The lender must sell the home for fair market value based on an appraisal.
○ A real estate agent is hired to professionally market the property.
○ Commissions and legal fees are paid from the sale proceeds.
○ Any remaining funds go to the next mortgage holder or, if applicable, the
homeowner.
○ If the sale doesn’t cover the full debt, the lender can sue the borrower for the
shortfall.

Important: The lender does not take ownership of the property — they simply sell it using the
power granted in the mortgage agreement.

Buying a Power of Sale Property
Buying a Power of Sale property can be a great opportunity, but it comes with unique
conditions and risks.
Here’s what buyers and agents should keep in mind:
● Offers must include a special Schedule with clauses required by the lender.
● The property is sold “as is”, with no warranties.
● If the borrower pays their arrears before closing, the deal is cancelled.
● Unless it’s a new home or business property, HST is typically not payable.
● The lender pays any outstanding property taxes up to the closing date.
● Always make the deal conditional on a thorough home inspection (most lenders
accept this).
● Aim to close within 3 weeks to reduce the risk of the owner reinstating the mortgage.

● When possible, consider a pre-offer inspection to strengthen your offer with fewer
conditions.

What Is a Foreclosure?
Foreclosure is a lengthier and more complex process in which the lender becomes the legal
owner of the property through a court order.
How Foreclosure Works:
● The lender must sue the borrower and obtain a court order for ownership, which can
take up to a year.
● Once ownership is transferred, the lender can renovate, market, and sell the property.
● If the property sells for more than what’s owed, the lender keeps the profit.
● However, if there’s a shortfall, the lender cannot sue the borrower for the difference.
● Because of the lengthy timeline and limited recovery options, foreclosure is rarely
used by institutional lenders in Ontario.

Private lenders may pursue foreclosure if there’s expected to be a significant shortfall or if they
prefer to retain control over the property’s resale.

Why Lenders Prefer Power of Sale
● Much faster process — typically completed within a few months.
● No need to assume ownership or responsibility for the property.
● Flexibility to sell quickly and recover funds.
● Ability to sue the borrower for any shortfall after the sale.

Most banks and financial institutions prefer Power of Sale because it helps them clear bad debt
from their books efficiently while protecting their financial position.

Ownership Capacity: Understanding Joint Tenancy vs. Tenancy in Common
When dealing with distressed properties, it’s also important to understand ownership structure:
● Joint Tenants – Have the right of survivorship. If one owner dies, their share
automatically transfers to the surviving owner(s).
● Tenants in Common – Do not have the right of survivorship. When an owner passes
away, their share becomes part of their estate and is passed to their heirs.

Final Thoughts
Understanding the difference between Power of Sale and Foreclosure is crucial for
homeowners, buyers, and real estate investors.
If you’re considering purchasing a Power of Sale property — or if you’re facing potential
mortgage default — it’s essential to consult an experienced real estate professional and
seek legal advice to protect your interests.
The process can be complex, but with the right guidance, you can navigate it with confidence
and clarity.