There is an old saying often heard in gyms: “You can’t out-exercise a bad diet.”

When it comes to real estate, think of the mortgage as the diet and the exercise as your ability to make the payments. If one gets out of balance with the other, eventually something has to give.

With homeowners continuing to face financial pressures, mortgage renewals and higher borrowing costs than they enjoyed just a few years ago, we are hearing more about mortgage defaults, foreclosures and power-of-sale properties.

But what do these terms actually mean? And just how serious is the problem?

Let’s start with the numbers.

A mortgage is generally considered to be in serious arrears when payments are 90 days or more overdue. Technically, a mortgage can be in default well before that, but the 90-day benchmark is what the banking industry uses when reporting mortgage arrears.

I tend to look at mortgage arrears in two broad categories.

The first is mortgages held by conventional lenders. Think of the big banks. These lenders generally have stricter qualification requirements and, as a result, historically lower arrears rates.

The second category involves alternative lenders, often called B-lenders, along with private mortgage lenders. These lenders frequently work with borrowers who have difficulty qualifying through traditional channels. That might involve credit challenges, unconventional income or other financial circumstances.

Their lending criteria and interest rates often reflect the additional risk.

According to the Canadian Bankers Association, as of July 2026, approximately 0.29% of bank mortgages were 90 days or more in arrears. That’s roughly 1 in every 344 mortgages.

With approximately 4.9 million residential mortgages held by reporting Canadian banks, that translates into about 14,200 mortgages seriously behind in their payments.

Now compare that with mortgage investment entities, a category that includes certain private mortgage lenders. According to CMHC, their arrears rate reached 2.25% in the first quarter of 2026.

That’s a substantial difference, although we’re comparing two different types of lenders and reporting periods.

In the grand scheme of things, the number of bank mortgages in arrears remains relatively small. Nevertheless, the increase in arrears is something worth watching, particularly in markets where home values have declined.

After all, being unable to make your mortgage payments is one problem. Being unable to sell your home for enough to discharge the mortgage is quite another.

So what happens when a homeowner can’t pay?

This subject came up recently when our real estate office held a workshop on something called “short sales.”

The reality is that lenders generally don’t want to be in the real estate business. They want to lend money, collect interest and have their mortgages repaid.

Taking action against a homeowner can be expensive, time-consuming and, depending on the circumstances, result in a financial loss.

Many lenders will work with homeowners experiencing financial difficulties, particularly when there is a reasonable prospect of bringing the mortgage back into good standing.

However, when a solution cannot be reached, there are several legal options available.

Power of Sale

This is by far the more common process used by mortgage lenders in Ontario.

Simply put, a power of sale allows a lender to sell a property to recover the money owed on the mortgage.

There are legal procedures that must be followed, including providing notice to the homeowner and allowing an opportunity to address the default.

In a typical Ontario mortgage containing a power-of-sale provision, the lender may issue a formal notice after the mortgage has been in default for at least 15 days. The lender must then wait at least another 35 days before proceeding with a sale.

The lender may also need to obtain possession of the property through the courts.

Here’s an important distinction: The lender does not automatically become the owner of the property. The homeowner remains on title until the sale is completed.

The lender is responsible for taking reasonable steps to obtain fair market value and applying the proceeds to the outstanding debt and permitted expenses.

If there is money left over after the mortgage, costs and other entitled claims are paid, that surplus belongs to the homeowner.

However, if the property sells for less than the amount owing, the homeowner may still be responsible for the shortfall.

So, contrary to what some buyers believe, a power-of-sale property is not automatically a bargain. The lender has an obligation to act reasonably when selling it.

Foreclosure

Although the terms foreclosure and power of sale are often used interchangeably, they are actually quite different.

With foreclosure, the lender asks the court to transfer ownership of the property to the lender.

Unlike a power of sale, where the lender sells the property to recover the outstanding debt, foreclosure can result in the lender acquiring the property, including whatever equity may remain in it.

In exchange, the lender generally gives up its ability to pursue the homeowner for any remaining mortgage shortfall once foreclosure is completed.

Foreclosure is a considerably more complicated legal process and can take a year or longer, particularly when contested.

For that reason, foreclosure is relatively uncommon in Ontario compared with power of sale.

Short Sale

Here’s where things get interesting.

Short sales became particularly well known in the United States during the real estate collapse of 2008.

Imagine purchasing a home for $700,000 with a $600,000 mortgage. Several years later, the market changes and the property is now worth only $500,000.

You want to sell, but there’s a problem. You owe the bank $100,000 more than the property is worth.

Welcome to the world of short sales.

In a short sale, the homeowner approaches the lender and requests permission to sell the property for less than the outstanding mortgage balance.

The lender reviews the circumstances and decides whether it will approve the transaction.

Depending on the agreement and applicable state laws, the lender may forgive the difference, negotiate repayment arrangements or preserve its right to pursue the outstanding debt.

The critical point is that the lender must agree to release its mortgage security so the sale can close.

Short sales are commonly associated with financial hardship, but a homeowner does not necessarily have to be behind on payments to request one.

And although short sales are most commonly discussed in the American real estate market, similar negotiated transactions can occur in Canada.

Why are Canadian mortgage arrears relatively low?

One important reason is the lending requirements imposed on borrowers by federally regulated financial institutions.

In Canada, we have what is commonly called the mortgage “stress test.”

Rather than simply qualifying a borrower at the interest rate they are being offered, lenders generally have to determine whether the borrower could afford payments at a higher qualifying rate.

Currently, for most newly underwritten residential mortgages subject to the federal stress test, that means qualifying at the greater of the mortgage contract rate plus 2%, or 5.25%.

The intention is to provide a financial cushion against rising interest rates and other economic shocks.

It’s certainly not a perfect system. Losing a job, experiencing a divorce, becoming ill or facing an unexpected expense can throw even the most carefully planned household budget into turmoil.

But the stress test is one of the safeguards that helps explain why serious mortgage arrears remain relatively uncommon in Canada.

Forty years in real estate. One piece of advice that hasn’t changed.

Over the past 40 years, I’ve worked through several very different real estate markets. I’ve seen periods when home values were rising so quickly that people thought they would never stop. I’ve also seen markets where values declined and homeowners suddenly found themselves facing difficult financial decisions.

During those years, I’ve offered advice to homeowners dealing with mortgage challenges, and that advice hasn’t changed.

If you’re having difficulty making your mortgage payments, don’t ignore the problem.

Your first call should be to your lender.

Explain what’s happening and ask what options are available. Depending on the circumstances, those options might include payment arrangements, changes to the mortgage terms or other forms of assistance.

The next conversation should be with an experienced mortgage broker. There may be refinancing or restructuring options worth exploring, although it’s important to understand the costs and risks of taking on additional debt.

It may also make sense to speak with an experienced Realtor to determine what your home is worth and whether selling is a practical solution.

If you’ve already received a formal notice from your lender, independent legal advice should be a priority. Time and legal rights matter.

The one thing I would strongly discourage is doing nothing.

Financial problems rarely improve by ignoring the telephone, leaving letters unopened or hoping that next month will somehow be different.

A difficult financial situation doesn’t automatically mean losing your home. There may be solutions available, particularly when you start exploring them early.

And if selling does turn out to be the right decision, it’s generally far better to make that decision yourself than to have it made for you.

After 40 years in real estate, one thing I know for certain is that homeowners are better served by knowing their options than by being afraid to ask about them.

If you have any question about mortgages or exploring selling a home in this market, I can be reached at lindsay@buyselllove.ca or 905-743-5555.