Mortgage Broker

CMB MAGAZINE cmba-achc.ca summer 2016 | 17 budgetanalysis e borrower immediately defaulted under the second renewal. e lender demanded payment at the 25 per cent rate. e Supreme Court of Canada said Section 8 is intended to protect landowners from charges that would make it impossible for them to redeem or protect their equity. If a borrower was already in default of payment under the interest rate charged on monies not in arrears, a still-higher rate – or a greater charge on the arrears – would render foreclosure all but inevitable. Section 8 applies both to discounts (incentives for performance) as well as penalties for non-performance, whenever the effect is to increase the charge on the arrears beyond the rate of interest payable on principal money not in arrears. e Court said that the first renewal did not contravene Section 8, as the interest rate increase is triggered by a mere passage of time rather than by a default. However, the second renewal charged the pay rate for money not in arrears, but charged 25 per cent for money in arrears. Labelling one as a pay rate and the other as an interest rate did not change the analysis, as the matter was one of substance rather than form. As the second renewal was retroactive, it had replaced the otherwise acceptable first renewal. e otherwise acceptable 25 per cent rate in the first renewal had been replaced by the ineffective rate increase in the second renewal. Because of that, the lender was entitled not to the 25 per cent rate but only to the pay rate. WHAT CAN MORTGAGE BROKERS AND LENDERS LEARN FROM THE SUPREME COURT OF CANADA CASE? 1 An interest rate increase triggered by the passage of time alone does not appear to be contrary to Section 8. A lender could, for example, enter into a no-penalty mortgage with a 13-month term in which the interest rate for the first 12 months is five per cent and the interest rate for the last month is 15 per cent. As the rate increase is not triggered by a default, it would appear to be in compliance with Section 8. The borrower would be rewarded by not having to pay a 15 per cent interest rate by paying out the principal balance at the end of month 12. Of course, depending on the circumstances – such as an inequality of bargaining power, the severity of the rate increases and any fiduciary relationship – other remedies in law might nevertheless be triggered. 2 An interest rate increase triggered by a default does infringe upon Section 8, regardless of whether the rate change is worded as imposing a higher rate penalizing default or as a lower rate rewarding an absence of a default. Here, a 13-month loan, in which the interest rate is five per cent but will increase to 15 per cent upon the default of the borrower, is not allowed. In addition, a 13-month loan, in which the interest rate is 15 per cent but will be dropped to five per cent if each monthly payment is made on time and the balance is paid by the mortgage due date, is also not allowed.

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