Most people wonder, what happens when you miss your first mortgage payment? What about the second? How about the third? Unless you are Scrooge McDuck or Richie Rich, most likely, you will need to borrow money from a lender to purchase a property in Ontario. This blog explores the impact of missed mortgage payments for homeowners and provides the best practices to avoid 3 strikes so you’re not OUT of the homeowner game.
Mortgage Process
Lenders generally require security in exchange for financing you a loan. They accomplish this in the form of a mortgage or charge. The mortgage/charge registered acts as a security against the property favouring the mortgagee/lender/chargee. Suppose the purchaser can’t pay the mortgage payments. In that case, the lender has rights and remedies typically spelled out in the mortgage commitment letter or standard charge terms that allow the lender to recover their security.
What is a Mortgage Commitment Letter?
A mortgage commitment letter is a contract between the borrower and the lender whereby the mortgagor (borrower) promises to pay on time and accepts the terms and conditions of the mortgagee (lender). A payment schedule is attached with the commitment letter specifying the principal amount, interest, payment frequency, and maturity date. The letter also includes clauses that protect lenders from losing security. The standard loan transaction and/or the mortgage commitment letter may stipulate clauses that provide remedies to the mortgagee when a mortgagor defaults on payment.
Strike 1: Missing One Mortgage Payment
When a homeowner misses a single payment on their mortgage, the mortgagee typically sends out a notice to inform the borrower about the missed payment. Suppose there is a clause on default of payment of interest secured by the charge. In that case, the homeowner may have to pay interest and also charge on the unpaid interest.
Below are some tips that can help you when you’re on strike one:
- Make sure to have your real estate lawyer review the commitment letter to grasp a better understanding of your mortgage contract. If there is no clause, the chargee can only charge interest on the principal outstanding.
- Set up a pre-authorized direct deposit for paying your mortgage.
- Regularly check your balance to ensure you have enough funds to pay the mortgage as per the payment schedule.
- If you cannot pay the mortgage because of unforeseen circumstances, speak with your lender and inform them about your situation. Always seek legal advice before taking this step.
Strike 2: Missing Two Mortgage Payments
You have now missed your second mortgage payment. At this point, the chargee/lender/mortgagee has sent you a second notice informing you to reconcile the default mortgage payment(s). Too many missed mortgage payments can impact your credit score, make it increasingly difficult to refinance, and open up the possibility for you to lose your property in the future. Informing your mortgage advisor or the chargee/lender/mortgagee can help you assess whether you are eligible for a mortgage deferral.
Below are some tips that can help you when you’re on strike two:
- It’s essential to speak with your mortgage advisor to learn about mortgage relief options to help you in your specific situation.
- Speak with your chargee/lender/mortgagee about your financial circumstances after receiving advice from your mortgage advisor and your lawyer. The chargee/lender/mortgagee can help you find an alternative relief option to help you in your specific circumstance.
- Assess whether you can afford to keep the property or whether selling the property and downsizing could be the best course of action.
Strike Three: Missing Three Paymen
Strike 3: Missing Three Mortgage Payments
According to section 24 of the Mortgages Act, three months after default in payment, the mortgagee will have the power to sell or the power to insure. If you have mortgage insurance, this will be triggered to allow the lender to continue receiving payments; however, the borrower is still on the hook for missed payments. The additional interest is charged and is generally required to pay the money due under the mortgage.
Suppose the homeowner refuses to pay the money. In that case, the mortgagee can exercise the power of sale and provide the property to a purchaser free and clear of interest. Alternatively, the mortgagee can also apply for a judicial sale which has a similar impact. The mortgagee can exercise a foreclosure whereby the mortgagee becomes the owner of the mortgaged property.
The mortgagor will need to review whether any redemption periods are applicable to repay their missed mortgage payments. You will need to speak with a lawyer and discuss your specific scenario to understand your options.
Below are some tips that can help you when you’re on strike three:
- Never miss your mortgage payments or at least try to remedy by paying up to the date and including any penalty costs.
- Always have your mortgage advisor and your lawyer on speed dial.
- Don’t avoid notices or letters informing you about your mortgage matters. It is better to deal with issues than to lose your property. The more you wait to deal with problems, the fewer options are available to you.
What Happens if You Sell Your Property?
The sale of your property doesn’t terminate the obligation to pay your mortgage. The borrower remains liable until the loan is repaid or the chargee releases the charge, either by deed or by the chargee’s actions.
Section 20 of the Mortgages Act provides that, in certain circumstances, in action to recover money, the mortgagee can use either the current owner, guarantor, or the original mortgagor to recover their security.
About TR Law Firm
TR Law Firm helps clients navigate complex problems to ensure that their legal issues are resolved. If you need any real estate legal consultation, please contact us to set a virtual chat with our experienced lawyers or feel free to call us at (905) 463-2088 or email at info@pmlawyers.ca.
