The house sold under power of sale and you still owe money. Now what?

The house is gone, the lender has been paid what the sale produced, and a letter arrives saying you owe another $84,000. The debt survived the sale. It is called a deficiency, the lender has a decade to collect it, and the sale that created it is also the best defence to it. Here is how the number is built, where it can be attacked, and what ending it looks like.

A mortgage is two promises. The charge on the land gives the lender the right to sell the property. The covenant to pay gives the lender the right to sue you for the debt. A power of sale enforces the first promise and leaves the second intact, so whatever the sale does not cover is still owed on the covenant. That is the deliberate difference from foreclosure, where the lender takes the house and the debt is extinguished. The two remedies compared explains why lenders choose the one that keeps the covenant alive.

The covenant binds everyone who signed it. A spouse on title, a parent who co-signed, a guarantor who signed a separate guarantee: each is liable for the full shortfall, jointly and severally, and the lender can pick whichever of them has income to garnish or a house to register against.

The lender's accounting after a sale runs in one direction. Start with the balance on the day of default, add interest at the contract rate to the closing date, add the lender's costs of the sale, and subtract the net proceeds. What is left is the deficiency. Each line is a place to look.

• The interest. Section 8 of the Interest Act forbids a higher rate on arrears than on the principal not in arrears. A private lender's default rate, or interest on interest, comes off the top.
• The costs of the sale. Legal fees, realtor commission, appraisal, property management, repairs, utilities and taxes carried during the listing. Section 43(4) of the Mortgages Act lets you have the lender's costs of a power of sale assessed by an assessment officer without a court order, and inflated legal accounts do not survive one.
• The net proceeds. The sale price less the commission and closing costs. If the house was sold for less than fair market value, the shortfall is the lender's own doing, and that is the defence below.
• The later mortgages. A second mortgagee is paid from the proceeds before anything comes back to you, but its debt is a separate covenant. If the sale did not reach the second mortgage at all, that lender has its own shortfall claim against you.

Ask for the lender's full accounting in writing before you respond to anything. The statement of adjustments from the sale, the realtor's listing agreement and commission, every legal account, and the interest calculation. A lender that will not produce them has a weak claim, and a lender that produces them has given you the material for the assessment.

A lender selling under power of sale has to act in good faith and take reasonable precautions to obtain fair market value. That is the standard from Oak Orchard Developments v. Iseman, affirmed by the Court of Appeal in Manufacturers Life v. Granada Investments, and it is enforced in the shortfall action. A borrower who can show the lender sold without an appraisal, listed for too short a time, accepted the first offer without testing the market, sold to an insider, or accepted a price it could not explain against the comparables has a defence that reduces or wipes out the deficiency. Where the borrower can prove a higher price would have been achieved, the difference is damages against the lender.

The Court of Appeal's 2023 decision in RCML Corp. v. 2524258 Ontario Inc. marks the safe harbour from the lender's side: eleven months on the market, more than fifty showings, and a price within the appraisal range. A sale that looks nothing like that is the one to challenge. The evidence is the listing history, the appraisal if there was one, the comparables at the time of sale, the offers received and rejected, and an expert appraiser's opinion of what proper marketing would have produced. A lender that took the house in month two and sold it in month three, in a market where the neighbours took four months to sell, has a problem.

Most Ontario debts are subject to the two-year basic limitation period in the Limitations Act, 2002. A mortgage covenant is not. Section 2(1)(a) of that Act excludes proceedings governed by the Real Property Limitations Act↗, and section 43(1) of that Act gives a lender ten years to sue on a covenant to repay money secured by a mortgage, running from the later of the day the cause of action arose and the day your interest in the land was transferred. The Court of Appeal has confirmed that a stand-alone guarantee of a mortgage debt is caught by the same ten years. A deficiency letter that arrives eight years after the sale is not out of time.

The practical consequence is that a shortfall does not go away by being ignored. It accrues interest at the contract rate, it can be sued on the year before you planned to retire, and a judgment on it lasts another twenty years and can be renewed. The choice is between dealing with it on your terms now or the lender's terms later.

A deficiency claim is an ordinary action for a debt, usually in the Superior Court because the amount exceeds the $50,000 Small Claims limit. It starts with a statement of claim, and the twenty days to defend it are the same as for any other claim. A defence that pleads improvident sale, challenges the interest and costs, and demands the accounting turns a registrar's default judgment into a lawsuit the lender has to prove. A defence filed late turns it back.

With a judgment the lender can garnish wages and bank accounts, register a writ of seizure and sale against any other land you own or later buy, and examine you under oath about your assets. If a co-signer or guarantor has a house, the writ goes against that house. The judgment also sits on your credit file, which is the reason a lender will sometimes accept a fraction of the shortfall from a borrower who can pay a lump sum and nothing from one who cannot.

1. 01Negotiate before the claim is issued. A lender with a weak sale, inflated costs, and a borrower with no assets will often accept a lump sum of a third to a half, or a payment plan, in exchange for a release. Get the release in writing and make sure it covers every co-borrower and guarantor.
2. 02Defend, and counterclaim for the improvident sale. If the sale was bad, the litigation is the leverage. A lender that has to prove its marketing in front of a judge settles on other terms than one that expects a default judgment.
3. 03A consumer proposal. The shortfall is now unsecured, because the security has been sold. A proposal under the Bankruptcy and Insolvency Act can compromise it along with the rest of your unsecured debt and stops the lawsuit while it runs. Talk to a licensed insolvency trustee once the shortfall figure is settled, not before, so the proposal deals with the right number.
4. 04Bankruptcy. The last resort, and for a large shortfall with no assets to protect sometimes the honest one. A mortgage deficiency is a provable claim and is discharged with the rest.

If you are earlier in the process, before the sale, the best answer to a shortfall is not to have one. A sale on your own terms, negotiated with the lender in the first month of default, nets more than a lender's sale and is the subject of what happens if you cannot pay your mortgage. The power of sale timeline shows how much of that month is left.

Everything above is the law as it stands in September 2026.

A deficiency claim is where the lender's conduct during the sale gets tested, and it is the last place a borrower has leverage. Reading the accounting, assessing the costs, and building the improvident sale evidence is what changes an $84,000 letter into a settlement. If a lender is claiming a shortfall from you anywhere in the GTA or Ontario, Telesh Law Firm Professional Corp can review the sale and the claim, and you can read more about how we handle civil litigation.

• Ontario courts
• Deadlines
• Cost & fees

This article is general information, not legal advice, and does not create a solicitor-client relationship. It is current as at its publication date and is not revised as the law changes. For advice on your specific situation, book a consultation or call 416-639-0887.

Written by

Caleesis Telesh

Founder & Principal Lawyer

LL.B. · B.A., York University · Member, Law Society of Ontario

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