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?
