Foreclosure: what is it and what does it mean for youJun 19 2023
This month the Bank of Canada increased the interest rate to 4.75% and signaled more increases are likely to come. With mortgage rates generally moving in tandem with the Bank of Canada rate, it is likely that homeowners are going to be hit by increases on their mortgage rates in the near future. This could have an effect on the market, and in particular on foreclosure rates.
What is Foreclosure?
Foreclosure is the legal process by which a lender takes possession of a property owned by a borrower who has failed to make mortgage payments as set out in their contract. When a homeowner falls behind on their mortgage payments, the lender can initiate foreclosure proceedings to recover the outstanding debt by selling the property.
The specific timeline and procedures involved can vary depending on the terms of the mortgage agreement. Generally, the lender will issue a notice of default indicating the homeowner is breaching the terms of the mortgage or loan agreement. If the homeowner does not rectify the breach, the lender can then go to court to seek an order to sell the property and ultimately to get approval for a sale of the property.
Why are we expecting an increase?
Mortgage rates are either variable or “fixed” at a certain locked in percentage for a period of time. Mortgage rates are generally slightly above the Bank of Canada rate, and you usually pay even slightly more still when locking in for a fixed term.
Where a homeowner has a variable rate mortgage, they will be impacted by rate increases on an ongoing basis. While this can be an unfortunate side-effect of a variable-rate mortgage, it also can have a positive impact. At the beginning of the Covid-19 pandemic, for example, rates decreased and those with variable-rates saw their mortgage payments decrease while nothing changed for those with fixed-rates.
The low rates in 2020 meant many people entered the housing market for the first time or took on greater debt. Rates have been steadily increasing since early 2021 and now those same people may be unable to afford the increased payments.
Many homeowners locked in to fixed terms when the rates were low in 2020. A homeowner who entered into a 3-year term in 2020 could have been paying rates between 1% and 2%, and is looking to refinance in 2023 at rates above 5%.
These homeowners had the benefit of the fixed term, but now they are faced with a massive financial adjustment. This can have a profound effect on foreclosure rates, as homeowners who stretched to purchase during the previous market boom could be pushed over the edge when it comes time to refinance.
What does this mean for you?
Foreclosure can have serious consequences for the homeowner, including the loss of their property and potential damage to their credit rating. If foreclosure proceedings are commenced, the homeowner may also be responsible for the lender’s legal fees.
If you’re a homeowner who is feeling the pressure of an impending refinance, know your options and act early. The worst mistake that people make when facing an impending foreclosure proceeding is ignoring the problem. It’s completely understandable, as the stress is intense and can be overwhelming. However, know that you’re not alone! Our foreclosure team at RDM assists borrowers by negotiating with Lenders on your behalf when a foreclosure is pending or imminent.
If you’re a private or institutional lender, be ready for the potential coming of defaults on your outstanding loans. Make sure to surround yourself with a good team with experience collecting on debts, including foreclosures. Our litigation team at RDM has the kind of experience you need to negotiate and act on outstanding debts.
If you’re a potential home buyer, it is possible that in the coming years more foreclosure properties could come up for sale at reduced prices. If this does happen, which remains unclear at present, this can put downward pressure on the housing market generally as well.
To find out more about foreclosure and debt collection, you can reach out to our intake team at 778 666 3723 to schedule a consult with one of our litigation lawyers.