How the Court deals with a home foreclosure depends on whether the mortgage is a high ratio, insured mortgage or a conventional mortgage where the borrower’s down payment was at least 20% of the value of the home.
If you are facing foreclosure in Alberta, it is important to know what type of mortgage you have. Knowing whether you have a high ratio, insured mortgage or a conventional mortgage affects two important things in the foreclosure process:
- the redemption period, being the period of time you have to try to stop the foreclosure, and
- whether the Court can grant a deficiency judgment against you if your property is worth less than the amount owing on the mortgage.
This article describes these two types of mortgages in Alberta and explains how the foreclosure process differs between them.
Before diving in, a few things to note:
- The laws governing mortgages differ from province to province. This article deals with the laws that apply in Alberta only.
- The insurance discussed in this article is mortgage insurance, not property insurance. Regardless of the type of mortgage, all borrowers must carry property insurance on their property.
High Ratio, Insured Mortgages
In Canada, a mortgage must be insured if the borrower is financing more than 80% of the property’s value. For example, you will require mortgage insurance if you have a mortgage of $400,000 or more on a house worth $500,000. Mortgage insurance protects a bank against the possibility that the amount owing on the mortgage is greater than the value of the home. The bank’s potential loss is called a deficiency.
Borrowers pay the premium for mortgage insurance either as an initial lump sum or as part of their mortgage payments. They are often surprised to learn the mortgage insurance protects the bank and not the borrower. In Alberta, mortgage insurance is provided by Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, and Sagen (formerly Genworth).
If a borrower defaults on the mortgage, and the lender sells the property, the insurer will reimburse the lender for the deficiency. By lowering the bank’s risk, mortgage insurance allows borrowers to own a home if they have a down payment of less than 20% of the value of the home.
Having an insured mortgage affects the foreclosure process in two ways:
- The bank can get a judgment against the borrower for the deficiency. The Court calls this a deficiency judgment.
- The Court may give the borrower a short or no redemption period.
Deficiency Judgment
With an insured mortgage, the bank can get a judgment against a borrower for a deficiency if it sells a home and recovers less from the sale of the home than the amount owing on the mortgage. For example, imagine a borrower owes $500,000 to a bank, and the bank sells the home and recovers $450,000. The bank will get a deficiency judgment for the remaining $50,000. The judgment is a court order directing the borrower to pay the amount to the bank.
Once the bank has a deficiency judgment against the borrower, it will transfer the judgment to the insurer. The insurer will decide whether to try to collect the judgment amount from the borrower.
The insurer can try to collect the judgment by garnishing the borrower’s employment income (i.e., collecting a portion of their wages), by seizing personal property (e.g., a vehicle), or by using other legal tools.
Redemption Period
The law gives borrowers a default redemption period of six months (12 months for farm properties) to take steps to stop the foreclosure process. The Court can lengthen or shorten this period. The default redemption period does not apply to high ratio, insured mortgages. When there is a high ratio, insured mortgage, the Court can decide whether it will give the owner any time to try to stop the foreclosure.
If the lender is facing a deficiency, the Court will usually refuse to give the borrower a six-month redemption period, regardless of what type of mortgage is involved. Instead, the Court will give the borrower a much shorter time to try to end the foreclosure.
During the redemption period, borrowers may be able to stop the foreclosure by:
- repaying the arrears (the payments they have missed) along with the costs the lender incurred in the foreclosure proceedings,
- refinancing with a different lender, or
- choosing to sell the property themselves (some borrowers believe they can get a better price for their house if they sell it themselves rather than waiting for the bank to sell it).
Some borrowers choose to do nothing during the redemption period and let the bank sell the house after the period is over.
Conventional Mortgages
A conventional mortgage does not require mortgage insurance because the borrower provided a down payment of at least 20% of the property’s value.
When a borrower defaults on a conventional mortgage, the lender has no right to a deficiency judgment against the borrower, even if the property is worth less than the mortgage amount still owing. If there is a deficiency, the lender’s options are to take the property or to take a loss on the sale. The default redemption period of 6 months applies when a property is subject to a conventional mortgage, but the Court can shorten or lengthen this period.
Summary
A borrower holding a high ratio, insured mortgage will be liable to the lender if their property is worth less than the mortgage amount still owing. As well, the Court may not give them any time to try to stop the foreclosure process.
A borrower holding a conventional mortgage is not liable to the lender if the property is worth less than the mortgage amount still owing. The borrower is also entitled to a default six-month period to pay the arrears and the lender’s foreclosure costs, though the Court can change the length of this period.
There are other types of mortgages that a residential borrower may hold which can affect the foreclosure process. For example, the process for a mortgage granted under the National Housing Act is usually the same as a high ratio, insured mortgage. This same process also applies to an individual who has been assigned a mortgage where the original borrower was a corporation unless the individual is using the property as a residence or farmland.
How to Determine What Type of Mortgage You Have
To determine the type of mortgage you have, follow these steps:
- Review your mortgage documents. Review your mortgage agreement and any other documents from your lender. These documents typically outline the terms and conditions of your mortgage, including the type. You likely have a document called a “disclosure statement”. If it shows the payment of an insurance premium (usually in the thousands of dollars), it is likely you have a high ratio, insured mortgage.
- Contact your lender. They can tell you the type of mortgage you have.
- Talk to a mortgage professional. Mortgage brokers or financial advisors who specialize in mortgages have expertise in the mortgage industry. They can assist you in determining the type of mortgage you have based on your specific circumstances.
A word of caution! If the bank starts foreclosure proceedings, do not rely on their Statement of Claim to decide what kind of mortgage you have. A Statement of Claim is a legal document filed in court that outlines the lender’s claims against the borrower. Sometimes lawyers use “boiler plate” documents that do not set out the correct facts. The Statement of Claim may wrongly state that the mortgage is a high ratio, insured mortgage. It is wise to check for yourself what kind of mortgage you have.
Get help
For accurate information on foreclosure laws and protections in Alberta, consult professionals. Reach out to your financial institute, your mortgage broker or legal professionals to confirm what foreclosure process applies to your mortgage.
If you cannot afford to pay for professional help, contact the Consumer Debt Negotiation Project at the Edmonton Community Legal Centre or one of the other legal clinics serving low-income individuals in Alberta. If you have an upcoming court date in Edmonton or Calgary, ask the lender’s lawyer if they can schedule it for a day when a volunteer lawyer will be available from Pro Bono Law Alberta’s King’s Bench Assistance Program.
You can also read more about the defences available to homeowners in Alberta during foreclosure proceedings in the summer 2023 issue of the Alberta Law Review.
AUTHORS’ NOTE Thank you to Judith Hanebury, KC for providing excellent editorial assistance in preparing this article.
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DISCLAIMER The information in this article was correct at time of publishing. The law may have changed since then. The views expressed in this article are those of the author and do not necessarily reflect the views of LawNow or the Centre for Public Legal Education Alberta.
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