Mortgage Broker

Summer 2016

Mortgage Broker is the magazine of the Canadian Mortgage Brokers Association and showcases the multi-billion dollar mortgage-broking industry to all levels of government, associated organizations and other interested individuals.

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16 | summer 2016 cmba-achc.ca CMB MAGAZINE SUPREME COURT OF CANADA'S DECISION e Supreme Court of Canada says it makes no difference. Courts will look to the substance and not the form of the arrangement. What counts is how the change in the rate operates and the consequences it produces, without regard to the label attached to the change (such as "bonus," "discount" or "benefit"). If the change of interest rate has the effect of increasing the rate, the court will not enforce the increase. In the specific case the Supreme Court of Canada was deciding, the lender had loaned the borrower $27 million at the annual rate of prime plus 2.875 per cent. When the borrower was unable to pay out the mortgage on its due date, the parties entered into a renewal agreement with a term of seven months; the annual rate was prime plus 3.125 per cent for the first six months and 25 per cent for the seventh month. e borrower could not pay out the mortgage on the maturity date of the renewal and the parties entered into a second renewal at an annual rate of 25 per cent. e borrower was required to make payments only at the greater of 7.5 per cent or prime plus 5.25 per cent (the "pay rate"). e mortgage would accrue at 25 per cent, but the difference between that rate and the pay rate would be forgiven if there was no default in payments and the balance was paid out by the mortgage due date. Some things all brokers need to know about interest rate penalties and incentives BY RAY BASI, LL.B STAFF, EDUCATION AND POLICY REVIEW The Good, the Bad and the Interest If the change of interest rate has the effect of increasing the rate, the court will not enforce the increase. THE QUESTION Can a lender reward a borrower for good behaviour? Specifically, in exchange for the borrower having not defaulted on payments due under a mortgage, can the lender charge a lower rate of interest than the ordinary interest rate stipulated in the contract? ere is no question that a lender cannot charge a borrower a higher rate of interest on arrears than on principal money not in arrears. Section 8 of Canada's Interest Act prohibits it. But what if the lender charges a higher rate of interest to begin with and then reduces it if there is no default? What if the lender rewards the good borrower by reducing the interest rate, rather than punishing the bad borrower by increasing it?

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