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When compared to other loans or lines of credit, a home equity loan is typically regarded as a smart financial maneuver.  The logic is straightforward: using an existing asset for financial gain or help is smarter than simply borrowing money from a lender such as a bank.

Let’s look at some specific reasons as to why leveraging your home equity is a smart play if you understand how these loans work.

It’s a Return on your Investment

This isn’t to suggest that a home equity loan is providing a dividend, because it’s not. What this means is that every month as you pay off the debt of your mortgage, you are building up equity. This equity is incredibly handy when you need a cash influx. Your home is your investment; it should be working for you.

Use it on the Appropriate Necessities and you won’t Regret the Decision

There are acceptable reasons to dip into your home equity, and if you don’t stray from these legitimate reasons then you most likely won’t experience regret.

The usual suspects are a medical emergency, home repairs, post-secondary education or maybe even to start or expand your business. A home equity loan is usually considered a good source to fund the above-mentioned expenses because they fall into the needs category and not the wants category.

Home Equity vs. Line of Credit

Lines of credit can be a viable and useful part of a financial strategy. The best part is that you only repay what you use. In most cases, the average line of credit provided by banks carries a bit more risk for borrowers that a home equity loan due to higher interest rates and less flexibility.

Avoid the Less than Smart Plays when it comes to Home Equity Loans

Anything to do with buying frivolous items with your home equity is a bad idea. Boats, cottages, cosmetic items or travel are not recommended uses. Using it for non-essential items can come back to haunt you.

Using the equity you’ve built up in your home in responsible ways can be an intelligent move and one that comes with reduced risk and won’t result in high levels of stress.

What Is Power of Sale in Ontario?

Power of sale in Ontario occurs when a homeowner fails to meet their mortgage obligations. If a mortgage falls into arrears (people fall more than three months behind on their payments), the lender can consider the borrower to be in default. This is when the power of sale process in Ontario begins.

The number of Canadian mortgages in arrears increased significantly during the economic downturn. In early 2008, 10,100 mortgages, or 0.27% of them, were in arrears; by 2011, the number had jumped to 18,702 or 0.45%. While the number of mortgages in arrears has fallen, 13,180 or 0.28%, of all Canadian mortgages were still in arrears at the end of 2016.1 That may not sound like a lot, but it affects a lot of families.

There are a lot of reasons why Canadians get into debt. Some debt is easier to pay off than others. When the debt load gets to be too big, households have trouble juggling bills and deciding which ones get paid off first. More often than not, the mortgage is the first bill that does get paid; however, even mortgage payments can get missed when money is tight. But lenders are only so forgiving.

Power of sale is very common in Ontario. When the homeowner defaults on the mortgage, it gives the lender the power to sell the property and collect the outstanding balance of the mortgage. When the power of sale occurs, the homeowner still retains the title to the property and keeps any surplus after the debts and costs are paid.

With the cost of housing soaring in the Greater Toronto Area, many first-time homebuyers are attracted to the idea of a power of sale property as they hope to get a deal on it. But in a power of sale situation, lenders are obligated to get fair market value for the property.

Types of Power of Sale

In the unfortunate event of a power of sale, the lender has the legal right to recover their interest in the property. But the homeowner is not left on the sidelines. There are power-of-sale rules that both the lender and borrower have to follow as outlined in the Ontario Mortgage Act.

Under the Ontario Mortgage Act there are two types of power of sale: contractual and statutory.2

Contractual

A contractual power of sale occurs when the mortgage documents include the power-of-sale provision. A contractual power-of-sale timeline starts when the lender gives the borrower notice of a power of sale after 15 days of default.

The notice is called a Notice of Sale and is attached to the Mortgage Act. It informs the borrower of the lenders intention to exercise their power-of-sale right and includes detailed information on the mortgage: the date the mortgage was made, the amount owing, and a warning that if the amount owing is not paid by a specific date, the lender will sell the property.

Under the contractual power-of-sale timeline, the borrower has 35 days to pay unless it is stated otherwise in the mortgage. If after 35 days the borrower has not corrected the default, the lender can sell the property. Usually it is listed with a real estate agent, but it can also be listed independently or put up for auction.

Statutory

A statutory power of sale occurs when the power-of-sale provisions are not included in the mortgage. While it is uncommon for the power-of-sale provisions to not be included in the mortgage, the lender can still initiate a power of sale as long as the borrower has been in default for three months or longer.

If the power of sale is statutory, the borrower has 45 days to pay. During this period, the lender cannot take any further action. Meanwhile, the borrower can repay the amount owning on the mortgage and bring it back up to date.

If, after 45 days, the property owner fails to catch up on their mortgage payments, the lender can step in and sell the property.

The Power-of-Sale Process in Ontario

The power-of-sale process in Ontario was created to keep “foreclosure” out of the court system and allow the lender the get the defaulted loan back in order. Still, a power of sale can occur quickly, in as little as 53 days. Again, if the power of sale goes through, any extra money is given to the homeowner unless there is a shortfall, in which case, the owner is responsible to make up the difference.

But the power-of-sale process is a lot less painful than a foreclosure. A foreclosure is a legal process where the lender gets a court order to take possession of the property. The rules for a foreclosure are also a lot stricter than with a power of sale. In a foreclosure, ownership goes to the lender. The lender does not need to negotiate with the prospective buyer and, as a result, the selling price is not as important as it would be with a power of sale in Ontario. At the same time, any profits that come from the sale of the house go to the lender. As does any loss.

Major Differences

Power of Sale

• Borrower remains title holder
• Property usually sold using a realtor
• Borrower responsible for any losses
• Extra money from sale goes to borrower

Foreclosure

• Property gets transferred to lender
• Property usually sold at auction
• Borrower is not responsible for any losses
• Extra money goes to the lender

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Canadalend.com, Helping Canadians with their Mortgages

If you’re in arrears with your mortgage and are looking for a way to get caught up with back payments, contact a mortgage broker at Canadalend.com. The independent mortgage experts at Canadalend.com will help evaluate your financial situation and consider all of your options.

To find out what your options are, contact Canadalend.com today. Or you can apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

Sources:

1. “Number of Residential Mortgages in Arrears,” Canadian Bankers Association, last accessed March 16, 2017; http://www.cba.ca/Assets/CBA/Files/Article%20Category/PDF/stat_mortgage_db050_en.pdf.
2. “Mortgage Act,” Government of Ontario, last accessed March 16, 2017; https://www.ontario.ca/laws/statute/90m40/v6#BK34.

For those considering a home equity mortgage and are new to its potential benefits, the best course of action is to speak with an experienced, trusted professional. Knowing exactly what questions to ask is important so that you can get the answers you need and make an informed decision.

Is my Reason for Applying for a Home Equity Mortgage a good one?

The first thing you want to do is disclose why you are considering a home equity mortgage. An honest mortgage professional will tell you whether this type of loan is appropriate for your needs. For instance, if you are planning to borrow against your home to pay off a credit card debt or take a cruise, they should immediately dissuade you. If you are considering this type of loan to improve your property for future real estate, then they should reassure you that that is typically an acceptable reason.

What is the Repayment Structure?

With any loan, you want to make sure you understand every aspect of it and an important aspect is how you will be expected to repay. Every loan and lender is different and while it might seem obvious, no matter how badly you need the loan this isn’t a question you want to gloss over.

Are the Terms of the Loan Negotiable?

Even if you know the interest rate and terms of your home equity loan going in, you should always ask if there’s room to negotiate. Even if the answer is no, it’s better to ask and try to walk away with more value. The goal is to enter into the best arrangement for your financial future.

Don’t be Scared to ask for the Fine Print to be Explained to you

There’s a lot of fine print with a home equity loan so take the time to peruse and ask questions before signing. Some of it will feel minute and insignificant but it can be anything but.

There’s no such thing as a dumb question and no professional will expect you to understand what it all means. The onus is on you to ask the right questions.

Renovating a house or office is a pain. There’s no way around it. The space becomes a construction site, there’s a constant stream of workers entering and exiting and you will most likely experience at least one if not several delays.

In the long run, there’s a lot of benefit to undergoing a renovations project even if the short-term pain is significant.

Renovations can add a ton of Value to your Property

Just about any upgrade to your house can immediately increase its overall value, especially if it’s more than cosmetic. New appliances, floor or carpet refreshes or a room renovation that modernizes or makes it more functional are all investments that should provide a return when you sell.

Some Renovations are better than Others

If you want to feel the value that renovations can make to your home than focus on the kitchen. This is the room that can have the largest impact. Before demolition, do your research to find out which kitchen trends are popular.

Small Touches Can Transform a Space

Most people focus on the large overhauls for houses and offices but sometimes the lighter touches can be the most dramatic. Something as small as under cabinet lightning can make a big difference to a kitchen. Replacing laminate flooring with hardwood can completely change the atmosphere of a room. Get creative and consider millwork and finishes as much as the bigger items.

Focus on Modernity but There’s a Caveat…

The question to ask yourself when renovating is does this reflect modern tastes and sensibilities. Even if something is meant to be kitsch or retro it can still reflect what is on trend. While renovations today might look dated in 10 years, you should consider when you might sell and speak to contractors about how easy future updates might be.

Renovating takes a savvy mind and a lot of patience. If you can withstand the psychological trauma that might come with the experience, you could be find your pockets lined with a healthy return on your investment.