Second Mortgage Finance Rates

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Interest on arrears on mortgages which are organised as a discount for punctual payment and are forbidden under § 8 of the Interest Law.

Paragraph 8 of the Interest Act (Canada) (paragraph 8 ) precludes creditors from calculating a higher interest charge in the event of a mortgage failure on immovable properties than before the failure. This means that if a mortgage with an interest of five per cent is raised to 10 per cert during its life, if the debtor fails to repay the amount due at the due date, or if the debtor defaults, the rise violates Section 8.

In addition to interest, this section covers financial penalties, sanctions and lump-sum rebates where the result is that the fee for delay exceeds the interest due on the amount of capital before a delay. Krayzel, the Supreme Court of Canada (SCC) found that interest rates raised as a result of late payment of a mortgage in breach of Section 8, regardless of whether or not the interest rates on late payment are discounted rather than punished, had been raised.

At Krayzel, when the debtor was not able to disburse his mortgage on the due date, the debtor and the creditor concluded several mortgage amendment contracts which extended the duration of the credit and increased the interest rates. Under the second Mortgage Amendment Arrangement, an interest payment of 25 per cent per annum would be applied, but interest would also be paid at a much lower discount per month at a much lower paying instalment, provided there was no failure of the credit.

Most SCC considered that Section 8 applied in equal measure to mortgage conditions that provided for'discounts' or incentive payments and to non-compliance fines where the effect of those conditions was to raise the fee for default in excess of the interest on capital not in arrears. However, the SCC did not consider that Section 8 did not apply to mortgage conditions that provided for 'discounts' or incentive payments.

Thus, the 25 % per annum interest fixed in the second Mortgage Amendment Arrangement was annulled and the applicable interest was considered to be the lower 'wage rate'. Depending on the mortgage credit facility it seems that providing a rebate to a debtor for punctual payments as opposed to punishing for non-payment of punctual payments violates Section 8.