Mortgage Default Insurance Canada

Mortgage Default Insurance Canada

In Canada, any time that someone wants to buy a property with less than 20% down payment, the lender/banks require the homeowner to obtain high ratio mortgage insurance. A High ratio mortgage is defined as a mortgage in excess of 80% of the value of the property. The mortgage insurance is therefore for the protection of lender/bank, and not for the protection of the homeowner.

The foreclosure process in every province in Canada is different. There are two types of foreclosure processes in Canada: judicial or power of sale. The Courts only issue orders for foreclosure when there is little or no equity, or when the mortgage is exceeding the current value of the property. Even though it is done at the request of the plaintiff/lender/banker, the Courts prefer to have the property sold under the judicial sale.

In Canada, the banks are not allowed to be in the business of owning real estate. They require immediate sale so that they can qualify for the shortfall, if any. This allows them to make a claim under the mortgage insurance policy and recuperate their losses.

The mortgage insurance company will then seek reimbursement from the property owner for the amount they have paid out to the lender or the bank. The liability under the mortgage does not continue once the property is sold but the liability under the insurance policy does continue. In simple words, if someone sells a property and the new owner assumes the mortgage and then defaults, the original owner can end up with a judgment against them for the full value of the lender/banker’s loss.

These judgments tend to mushroom once a real estate boom busts. The original owners can end up with a judgement against them for thousands of dollars, not realizing that they were the originator of the high ratio mortgage. Unfortunately, they are not aware that they have signed a personal covenant, meaning that they are personally liable for the mortgage. Sometimes, the lack of knowledge of information, legal advice or mortgage advice can wreak havoc in their lives.

In some cases, the new owner who subsequently resold the property to a third party and the new owner defaults. Then the lender/bank can make a claim for the loss of the mortgage amount and can obtain judgments against all parties who had owned the property since the mortgage was granted. The mortgage lender/banker will obtain judgement against the originator of the mortgage, and all other subsequent owner who have taken over the same mortgage.

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The above information is provided as a guideline and is not intended to give a professional legal advice. Please consult a real estate lawyer for their opinion on your particular case

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Navtaj Chandhoke
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