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We have previously written about lenders attempting to charge a three-month interest fee (or "penalty", or "bonus") after a default by a mortgagor Three-Months' Mortgage Interest – To Charge or Not to Charge – CP LLP. It is settled law that, after a default, a mortgagee cannot charge such a fee, as it violates section 8 of the Interest Act. Similarly, mortgage terms that purport to increase the interest rate applied to arrears upon a default will not be enforced.
A recent Court of Appeal decision addresses an interesting (no pun intended) interest provision in a mortgage agreement that the trial judge had found to violate section 8 of the Interest Act. In Rabinowitz v. 2528061 Ontario Inc., 2026 ONCA 21, the Court of Appeal considered a mortgage agreement relating to a vacant property that a purchaser intended to develop. In response to a request by the purchaser for an extension of the closing date to allow for additional due diligence, the vendor requested a loan of $600,000. The loan was secured by a mortgage on the property, with the intention that the funds would be credited toward the purchase price. Regarding interest, the mortgage agreement provided as follows:
"The Interest Rate of the Charge shall be 0% until the Balance Due Date on July 10, [2018]. Beginning July 10, [2018], the Interest Rate of the Charge shall be 12.0%, calculated monthly, not in advance, until the payment of the Charge in full."
At trial, the court found that the jump in interest from zero to 12% on the balance due date meant that interest would only be payable if the principal was not paid, i.e. upon a default. Accordingly, the provision violated the Interest Act. The Court of Appeal granted the purchaser's appeal of this finding. Relying on the settled law that ordinary commercial contracts must be interpreted in accordance with their plain language as understood by a reasonable business person, the Court emphasized the significance of the interest rate commencing prior to the mortgage being in default (July 10th, rather than July 11th), and the fact that the interest-free period was premised on the completion of the purchase agreement. Once the sale did not close, the mortgage became a standalone agreement, with interest at 12%, as the parties agreed with the benefit of legal advice.
Although the facts of the Rabinowitz decision are unique, the importance the Court of Appeal placed on the timing of the increase in interest – before a default – serves as a reminder of the limited application of section 8 of the Interest Act. It only applies to prevent lenders from increasing the interest burden on mortgage arrears above the rate payable on principal money not in arrears. If a lender negotiates for the interest rate to jump just before a default (and as late as the due date for repayment of principal), the Court of Appeal has signaled such a provision will be enforceable.
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