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Interest - Mortgage

. Alleghe Mortgage Fund Ltd. v. 1988758 Ontario Inc.

In Alleghe Mortgage Fund Ltd. v. 1988758 Ontario Inc. (Div Ct, 2021) the Divisional Court considered an issue of s.8 of the Interest Act:
[17] We find that the motion judge erred in finding that the interest rate provision in the mortgage commitment breached s. 8 of the Interest Act.

[18] Section 8 of the Interest Act provides:
8(1) No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.
[19] For mortgages and other loans secured by real property, “default rates” of interest, whereby a higher rate of interest is triggered by default, effectively reserving a higher charge on arrears than that imposed on principal money not in arrears, are prohibited by section 8 of the Interest Act.

[20] The motion judge found that the First Interest Rate Provision – which provided that the interest rate is 8.25% for the first six months, and 18% per annum thereafter, unless the mortgage is renewed or discharged, or after the second renewal term has expired – breached s. 8 of the Interest Act, R.S.C. 1985, c. I-15. He said the following:
In accordance with the [First Interest Rate Provision], interest will be payable at 8.25% for the first six (6) months and will increase to 18.00% for the seventh (7th) month, unless the mortgage is renewed or discharged at the end of that month. If it is renewed so that the principal does not come due, then the interest will remain at 8.25%. But if it was neither renewed or if it was not paid on the date of maturity, then interest will go to 18.00%. If it was renewed and at the end of the second renewal not paid on the date of maturity, again the interest would increase to 18.00%.
[21] Although he acknowledged that the Supreme Court, in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18 (CanLII), [2016] 1 S.C.R. 273 found that an interest rate will not breach s. 8 of the Interest Act if the interest increases with time, and not with default, the motion judge went on to say the following:
Here, however, just like in the case of Lee v. He, with a bit more verbiage perhaps in this case, in all circumstances, if the mortgagor pays the principal on time, then its interest rate is 8 percent. And if it defaults in repaying principal when it falls due, the interest rate becomes 18 percent. In my view, it is a plain breach of section 8 for interest to increase simply because money was not paid on the due date, and therefore the clause in this case cannot stand. Interest is chargeable at 8.25 percent, therefore, throughout the mortgage.
[22] In Krayzel, the Supreme Court considered two different loan agreements. The first agreement established one rate of interest (prime plus 3.125% per annum), that applied for most of the term of the loan, and a second higher rate (25.00%) that became effective in the final month of the term. These are the facts of this case.


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Last modified: 17-11-22
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