Can The Bank Take Your House Even If You Pay Your Mortgage?
Can The Bank Take Your House Even If You Pay Your Mortgage?
by Wanderer / January 30, 2023
The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
It’s every home-owner’s worst nightmare. Already drowning in debt, and with a rampaging cost of living crisis causing many families to barely be able to make ends meet, they get a notice from their mortgage company that says something to the effect of:
You have 30 days to pay back your entire mortgage balance in full, or we’re taking your house. Have a great day!
Sound like a bad dream? Like something that would never happen here in Canada? Well, I got bad news for you: There are early signs of rough times ahead in the GTA real estate market, with some Toronto mortgage brokers reporting a rise in the forced sale of homes by private and alternative lenders.
Mortgage brokers report an uptick in forced sales of GTA homes, TheStar.com
I have to admit, even I was surprised that this was even possible. In my head, if you still have a job, and you’ve kept up to date with your mortgage payments, the bank can’t just foreclose on your house like that.
And the reason why this is happening is that these aren’t technically foreclosures. They’re called power of sales, and this is how they work.
Say you’re a mortgage company that gave out a mortgage on a $1,000,000 property in, say, early 2022. Then interest rates shot up over the course of the year. Depending on the type of mortgage this was, the mortgage holder may or may not see their monthly payment change, but regardless when the mortgage comes up for renewal, the property is now worth considerably less on the open market. The Toronto housing market has seen an average decline of about 20%, so let’s say this property is now worth $800,000. But the outstanding mortgage is still way more than that, say, $900,000.
It’s completely up to the lender whether they want to renew your mortgage for another term. In the above scenario, they might look at your salary, your credit worthiness, and the fact that you’ve kept up your payments so far and approve you for renewal. But if there’s anything different about your financial situation, like a change in job status, or if they’re simply feeling spooked about whether the house may fall in value even further, then they may reject you and demand the entire mortgage balance back all at once.
And if you can’t pay it, they can sell your house out from under you.
Welcome to the wonderful world of power of sales.
The big difference between a foreclosure and a power of sale is that technically, the borrower hasn’t done anything wrong. A foreclosure requires the borrower to miss multiple payments and ignore repeated requests from the bank to comply with their lending obligations. In a power of sale, the borrower may lose their house simply because their bank doesn’t think lending to you is a good bet anymore.
Is this fair? Not really. Again, the borrower didn’t do anything wrong here. But is it legal? You betcha.
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