Buying a property has been made easy by the availability of mortgagesand loans. When giving out a mortgage loan on a property, the lender has the right to sell the property should a default on the loan occur, without any legal proceedings. This is called the Power of Sale, and properties sold through this power can be used to recover debts.
In Canada, the Mortgages act categorizes to types of power of sale. One is Contractual and the other is Statutory. Most mortgage documents have the Power of Sale provision worked into its structure, and this is called the contractual power of sale – derived from the contract which defines the terms and conditions of the mortgage loan. While some contracts may not have the clause of power of sale, but the lender still has the liberty to sell off the property of a defaulter if the payment for a loan have not been duly received for three months or more. Power of sale has become a popular means of disposing off the property of payment offenders.
The lender starts by giving a notice to the borrower after 15days of default. This notice gives in the details of the mortgage like the date and value of the mortgage, the borrowers and other individuals who have an interest in the property and most importantly, it carries with it a warning. This warning is to the borrower- that if failing to pay within a specific date, the property will be sold as per the convenience of the lender. This also brings with itself a redemption period. If the power of sale is contractual, this period extends 35 days, and if it is statutory, it is of 45days. It is called the redemption period because during this time, the borrower can make the payments and claim back the mortgage. The bank cannot exercise the power of sale during the redemption period.
If the borrower fails to make payments at the end of the redemption period, the bank can then proceed to make the property available in the market. The sale of the property can be conducted through a private contract, tender or auction. A real estate agent is involved in the sale, and it makes sure that the sale is brought through professionally. The property on sale should attract proper attention in the market, with listings through various mediums explored.
The payment gathered from the sale of the property is divided into various blocks. The first goes into paying for the cost of conducting the sale i.e. paying for the broker, listings and all other acquired costs. The interest amount and cost of maintaining the mortgage will need to be addressed next. Then the principle amount of money will be recovered and the rest goes into paying for any other amounts pending in the mortgage. If there is still some balance left, it will be given to the borrower as repayment of the security money deposited during the time of procuring the mortgage.
It is a norm for banks and other financial organizations to follow power of sale, in order to avoid recurring losses. For anyone intending to buy such a property, it is wise to be careful and check for damages. A borrower, who has defaulted, may be continually in a cash-crunch situation, always unable to maintain his property. While damages like paint can be ignored, more serious damage like a leaking roof or other structural anomaly can actually spell trouble.