7 Critical Facts About What Happens When a Bank Forecloses on a Property in Ontario

In the Ontario real estate market, the word “Bank foreclosure” often strikes fear into the hearts of homeowners. However, there is a significant amount of nuance—and hope—hidden behind that legal term. Understanding exactly what happens when a bank forecloses on a property in Ontario is the first step toward protecting your equity, your credit, and your future.

While many people use the term “Bank foreclosure” as a catch-all for losing a home to a lender, Ontario actually operates differently from many other jurisdictions. This guide provides an in-depth look at the timelines, the legal documents, and the vital differences between a “Power of Sale” and a “Foreclosure.”

1. The Great Distinction: Bank Foreclosure vs. Power of Sale

Before diving into the steps, it is essential to understand that in Ontario, a “Foreclosure” and a “Power of Sale” are two distinct legal paths.

• Power of Sale: This is the most common method used by Ontario lenders. In this scenario, the bank does not take ownership of the home. Instead, they sell the property to recover their money. Any profit left over after the mortgage, interest, and legal fees are paid belongs to the homeowner.

• Foreclosure: This is a much rarer, court-supervised process. Here, the bank seeks to take full legal title to the property. If the court grants a foreclosure, the bank becomes the owner, and the homeowner loses all rights to any equity in the home. If the house is worth $800,000 and you only owe $400,000, the bank keeps the entire $400,000 surplus.

Because Power of Sale is faster and cheaper for banks, it accounts for the vast majority of “foreclosures” in Ontario.

2. The Trigger: When Does the Process Start?

The process doesn’t happen overnight. It typically begins with a Mortgage Default. A default isn’t just a missed payment; it can also be triggered by:

• Failure to pay property taxes.

• Allowing home insurance to lapse.

• Failure to maintain the property in good repair.

Usually, after 15 days of default, the lender gains the legal right to begin the enforcement process under the Ontario Mortgages Act.

3. Phase 1: The Notice of Sale (The 35-Day Clock)

The first formal legal document you will receive is the Notice of Sale under Mortgage. This is a high-stakes warning shot.

By law, the lender must give you at least 35 days (the “Redemption Period”) to pay the arrears and “reinstate” the mortgage. During this window, you have the right to bring the account current by paying the missed payments, interest, and any legal costs the bank has incurred so far.

Important Note: If you do not settle the debt within these 35 days, the lender can move to the next stage—taking possession of your home.

4. Phase 2: Statement of Claim and Writ of Possession

If the 35-day redemption period passes and the default remains uncured, the bank will file a Statement of Claim in the Ontario Superior Court of Justice.

This document serves two purposes:

1. Debt Collection: Suing the borrower for the full amount of the mortgage.

2. Possession: Asking the court for permission to take the house.

If you do not file a “Statement of Defence” (usually within 20 days), the bank can obtain a Default Judgment. This leads to a Writ of Possession, which is the legal document that authorizes the Sheriff to physically evict the occupants and change the locks.

5. Phase 3: The Sale Process

Once the bank has possession, they have a “Fiduciary Duty” to the homeowner to sell the property for Fair Market Value. They cannot simply sell it to a friend for $1 to get rid of it.

The Distribution of Funds (Power of Sale)

Under an Ontario Power of Sale, the money from the sale is distributed in a specific order:

1. Property Taxes: Any outstanding municipal taxes.

2. Costs of Sale: Real estate commissions and legal fees.

3. Lender Arrears: The principal, interest, and penalties owed to the bank.

4. Secondary Lenders: Any second or third mortgages.

5. The Homeowner: Any remaining surplus.

6. Can You Stop the Process?

Yes, but the window of opportunity shrinks as time passes. Here are the most effective ways to stop a bank from foreclosing in Ontario:

• Reinstatement: Paying the arrears and costs during the 35-day notice period.

• Refinancing: Moving the debt to a private lender or a “B-lender” who is more comfortable with credit issues.

• Selling Privately: Listing the home yourself often yields a higher price than a bank-forced sale, as banks sell properties “as-is,” which can scare away traditional buyers.

• Consumer Proposal/Bankruptcy: While this may temporarily “stay” (pause) legal actions, it does not permanently remove the bank’s right to their security (the house).

7. The Long-Term Impact: Credit and Deficiencies

If a bank forecloses or sells your home under Power of Sale, the impact on your credit score is severe and can last for 6 to 7 years.

Furthermore, if the house sells for less than what you owe (a “shortfall”), the bank can pursue you for a Deficiency Judgment. This means they can garnish your wages or seize other assets to make up the difference.

Summary Table: The Ontario Foreclosure Timeline

Frequently Asked Questions (FAQ)

How many missed payments before a bank forecloses in Ontario?

Technically, a bank can start the process after one missed payment (usually after 15 days of default). However, most major Canadian banks wait until you are 2–3 months behind before issuing a formal Notice of Sale.

Can I stay in my house during a Power of Sale?

You can remain in the home during the 35-day redemption period. However, once a Writ of Possession is issued and the Sheriff arrives, you must vacate the property immediately.

Does the bank keep the profit if they sell my house?

In a Power of Sale, no. The bank is only entitled to what they are owed. Any surplus must be returned to you. In a Foreclosure, yes—the bank keeps all equity.

Is a Power of Sale the same as an absolute foreclosure?

No. A Power of Sale involves the lender selling the home on your behalf to pay the debt. Foreclosure is a court process where the lender takes the title and becomes the owner.

What is a “Notice of Sale under Mortgage”?

It is the first legal step in the Power of Sale process in Ontario. It gives the homeowner 35 days to pay the arrears and costs to stop the sale.

Conclusion: Knowledge is Your Best Defence

Facing a mortgage default is incredibly stressful, but in Ontario, the law provides specific protections to ensure you aren’t left entirely empty-handed. By understanding the 35-day redemption window and the difference between Power of Sale and Foreclosure, you can make informed decisions to save your equity.

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