Private Mortgage Default in Kitchener Resolved Without a Forced Sale

The situation

Chantal and Micheline had lived in the same Kitchener house for close to three decades. When their children moved out and the stairs became more trouble than they were worth, they sold it for roughly $950,000 and moved into a smaller bungalow nearby, freeing up a substantial amount of cash. Chantal had spent her career as a software developer and Micheline as an accountant, and neither wanted to leave a large chunk of their proceeds sitting in a low-interest savings account while they figured out what to do with it.

A mortgage broker suggested an alternative: acting as private lenders on a second mortgage. A private mortgage works the same way as a bank mortgage in principle — the lender advances money and registers a charge against the borrower's property as security — except the lender is an individual or a small group of individuals rather than a financial institution. In exchange for taking on more risk than a bank typically would, private lenders can negotiate a higher interest rate than a savings account or a term deposit would ever pay.

Chantal and Micheline agreed to lend $180,000 to Nikhil, an investor who was buying a rental property in Kitchener valued at about $1,050,000. Nikhil already had a first mortgage of roughly $650,000 from a bank, and the $180,000 from Chantal and Micheline sat behind it as a second mortgage, with Nikhil covering the rest from his own funds. Treadstone Law was retained to prepare and register the second mortgage, confirm the payout figures owing on the first mortgage, and make sure Chantal and Micheline's position was properly protected on title before any money changed hands.

The problem

Being a second mortgage lender means being paid after the first mortgage lender in almost every scenario. If the property is ever sold — whether voluntarily or through a default process — the first mortgage is paid out of the sale proceeds before the second mortgage sees a cent. That structure is exactly why second mortgages pay a higher rate: the risk sits with the lender in second position.

About fourteen months after the loan was advanced, Nikhil's rental income dropped when a long-term tenant left and the unit sat vacant longer than expected. He missed one monthly payment, then a second, then a third. By the time Chantal and Micheline called Treadstone Law, Nikhil owed roughly $6,000 in missed payments, plus accumulating interest on the arrears that brought the total shortfall to about $8,000 against a $180,000 principal balance.

Chantal and Micheline were not looking to be aggressive. They liked Nikhil, understood that rental vacancies happen, and did not want to end up owning or forcing a sale of a property neither of them had any interest in managing. But they also could not simply let the arrears grow indefinitely. Every month of non-payment increased their exposure, and if Nikhil ever fell far enough behind that the first mortgage lender moved to enforce its own security, Chantal and Micheline's second mortgage could be wiped out entirely if the sale proceeds did not stretch past the first mortgage balance.

The couple needed to understand what their legal options actually were, how quickly they needed to act to preserve those options, and how to bring Nikhil back to a workable arrangement without triggering a formal sale process that neither side wanted.

What we did

1. Confirmed the default was real and properly documented. Before anything else, we reviewed the mortgage terms and the payment history to confirm exactly how much was owing, when each missed payment fell due, and what interest rate applied to arrears under the mortgage as registered. This mattered because any later notice or enforcement step needed to state accurate figures — an overstated arrears claim can undermine a lender's position later.
2. Sent a formal notice of default to Nikhil. Ontario mortgage law allows a lender to enforce a mortgage through a process known as power of sale once a borrower is in default and the required notice has been given and has expired. Sending that notice early preserves the lender's options — it starts the clock running on the statutory notice period without committing Chantal and Micheline to actually selling the property. It also puts the borrower on formal notice that the arrears need to be addressed, which is often what prompts a serious response.
3. Opened a parallel negotiation track. At the same time as the formal notice went out, we contacted Nikhil directly to explain that Chantal and Micheline preferred a resolution that let him keep the property, provided the arrears were addressed and their security was not put at further risk. Nikhil confirmed he had a new tenant lined up and expected rental income to recover within a couple of months, but needed more time before he could catch up the missed payments in full.
4. Negotiated a forbearance agreement. A forbearance agreement is a written arrangement where the lender agrees to pause enforcement in exchange for a revised repayment schedule. We drafted terms under which the $8,000 in arrears would be added to the outstanding balance and repaid over four months on top of the regular payments, with the formal notice period held in reserve rather than withdrawn, so Chantal and Micheline's legal position stayed intact if Nikhil missed the new schedule too.
5. Advised on the risk of proceeding to power of sale versus waiting. We walked Chantal and Micheline through what a power of sale would actually involve if negotiation failed: additional notice requirements, real estate and legal costs deducted from any eventual sale proceeds, and a real possibility that after the first mortgage and those costs were paid, little or nothing would be left for the second mortgage. That comparison made clear that a negotiated payout, even a slower one, was almost always the better outcome for a second mortgage lender in their position.
6. Reviewed and confirmed the final payout. Roughly ten weeks after the forbearance agreement was signed, Nikhil refinanced the property with a new lender at a higher first mortgage amount, using the proceeds to pay off the original first mortgage and pay out Chantal and Micheline's second mortgage in full, including the outstanding arrears and interest. We confirmed the payout figures, prepared the discharge of the second mortgage, and registered it once funds were received in trust and cleared.

The outcome

Chantal and Micheline recovered their full $180,000 principal, along with the interest that had accrued over the life of the loan and the $8,000 in arrears, without ever needing to serve a power of sale on the property or go anywhere near a court. Nikhil kept the rental property, refinanced on his own terms once his tenant issue resolved, and avoided the cost and stress of a forced sale process.

The formal notice sent early in the process did real work even though it was never acted on. It gave Chantal and Micheline a credible fallback position, which is often what makes a borrower take a repayment plan seriously rather than continuing to drift. Because the notice period was allowed to run in the background rather than being withdrawn, the couple never lost time if the forbearance agreement had fallen apart and enforcement had become necessary.

For Chantal and Micheline, the experience did not put them off private lending altogether, but it did change how they approached it. On a second private mortgage they made the following year, they insisted on a lower loan-to-value ratio, meaning their loan represented a smaller percentage of the property's value, which left more room for the sale proceeds to cover both mortgages if anything went wrong again.

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