Intricacies of Mortgage & Interest in Canada

The words Mortgage & interest are very common words not only in Canada but globally. The one who borrows is termed as borrower or loanee or mortgagor or chargor and the one who lends is termed as lender or mortgagee or chargee. In today’s modern world, which has become materialistic, things which were out of reach for common person are easily available to him through mortgages & contractual agreements of loans. Loans are provided not only by the Public Financial Institutions but also by Private Financial Institutions including the Private lenders.  Under a loan agreement, the borrower is entitled to use of the lender’s capital for some stipulated period. The borrower uses the lenders capital to buy out real or personal property or for business or personal use.  The lender is entitled to a stream of interest income and to the ultimate repayment of capital.

There are two types of categories of loans. One is mortgage loan & other is contractual loan without mortgage. Mortgages are secured loans and other loans are contractual agreements.  A mortgage loan facilitates individuals and entities to purchase real estate besides securing the interest of the lender.

No doubt, availability of loans has proved to be a boom not only for public including entities but also business opportunity to lenders.

Rate of interest & other charges varies from lender to lender as also from borrower to borrower, however, in Canada, there is criminal offence cap for charging annual rate of interest, which cannot exceed 60% on the credit advanced under an agreement or arrangement.

It is not uncommon now in the commercial world for loan contracts, other than mortgage loans, to require a substantially higher interest rate, if the loan becomes in arrears. Common sense suggests that this is recognized as a legitimate and effective way to ensure the prompt or timely repayment of the loan.

Mortgage & interest are regulated by Mortgages Act, R.S.O.1990,interest Act, R.S.C 1985, Bills of Exchange Act, R.S.C.1985, Unconscionable Transactions Relief Act & Criminal Code respectively.

Parliament has singled out mortgages on real estate for special treatment, or at least treatment that differs from loans that are not secured on real property. At least one legislative purpose, which can be inferred was to protect the owners of real estate from interest or other charges that would make it impossible for owners to redeem, or to protect their equity. If an owner were already in default of payment under the interest rate charged on monies not in arrears, a still higher rate, or greater charge on the arrears would render foreclosure all but inevitable.

The actual bone of contention is when the borrower makes the default in payment as per the mortgage commitment or contractual agreement resulting in commencement of default proceedings at the instance of lender & ancillary to this is when the borrower intends to clear the entire outstanding loan prior to due date. As to what type of amounts/charges can be claimed in a mortgage loan against the charge on real property by the lender for default committed by borrower and what are the liabilities of borrower, if borrower wants to clear the entire outstanding loan prior to due date or in case of default is being canvassed in this article based on provisions of various enactments as analysed by the Canadian Courts of Law. 

It is apt to consider the concept of Contracts, enforceability of contracts, severability of provisions of contracts, where the provision is unconscionable, illegal, void or the contract is void, rate of interest before understanding the concept of defaults:

Contracts:

The rights of the parties are governed by the contract entered between them. The contract is to be read as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. The overriding concern is to determine the intent of the parties and the scope of their understanding. The Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 recognized that ascertaining contractual interpretation can be difficult when looking at words on their own because “words alone do not have an immutable or absolute meaning”:   The Court explained that “the meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement”, but that the surrounding circumstances “must never be allowed to overwhelm the words of that agreement”:  The Supreme Court also stated: “While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement”:  The Court also clarified that the relevant surrounding circumstances “consist only of objective evidence of the background facts at the time of the execution of the contract. that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting”:  

No contract is made in a vacuum: there is always a setting in which they must be placed. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

The meaning of words is often derived from several contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement. The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. 

Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered considering the factual matrix.

Blue Pencil Approach-Severance of provisions of contract without declaring the whole contract void.

The blue-pencil approach is understood both as a test of the availability of severance to remedy contractual illegality and as a technique for effecting severance.  The blue-pencil approach as a test of the appropriateness of severance requires a consideration of whether an illegal contract can be rendered legal by striking out (i.e., by drawing a line through) the illegal promises in the agreement.  The resulting set of legal terms should retain the core of the agreement.  If the nature or core of the agreement is disturbed, then on this test the illegal clause in the contract is not a candidate for severance and the entire contract is void.  The blue-pencil approach as a technique of effecting severance involves the actual excision of the provisions leading to the illegality, leaving those promises untainted by the illegality to be enforced.

In Mira Design Co. v Seascape Holding Limited,1979 CanLII 1866, it was held that the conditions/provisions in a contract which are inconsistent with the statute or law can be severed without declaring the whole contract as void. The maximum rate of interest as per section 347 of Criminal code is 60% per annum, if a contract provides for rate of interest which exceeds 60% per annum, then, the said condition can be severed, and the court can mould the grant of interest limiting to 60% per annum. The purpose of s. 347 of Criminal Code is to punish everyone who enters into an agreement or arrangement to receive interest at a criminal rate. It does not expressly prohibit such behaviour, nor does it declare such an agreement or arrangement to be void.

Further the ONCA in William E. Thomson Associates Inc. v. Carpenter ,1989 CanLII 185 (ON CA) laid down “The following four factors  play a vital role in deciding between partial enforcement and declaring a contract void ab initio: (i) whether the purpose or the policy of s. 347 would be subverted by severance; (ii) whether the parties entered into the agreement for an illegal purpose or with an evil intention; (iii) the relative bargaining positions of the parties and their conduct in reaching the agreement; and (iv) whether the debtor would be given an unjustified windfall.  However, did not foreclose the possibility of applying other considerations in other cases, however, and remarked that whether “a contract tainted by illegality is completely unenforceable depends upon all the circumstances surrounding the contract and the balancing of the considerations discussed above and, in appropriate cases, other considerations. 

The Supreme Court of Canada in Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7 (CanLII) dealt with the concept of severance of provisions of contract by highlighting the blue pencil approach and thus holding that, the appropriate approach is to vest the greatest possible amount of remedial discretion in judges in courts of first instance.  The spectrum of available remedies runs from a court holding contracts in violation of s. 347 void ab initio, in the most egregious and abusive cases, according to the criteria identified in Thomson, to notional severance.  In the determination of where along the spectrum a particular contract lies, the considerations identified in Thomson by Blair J.A. should be referred to and analysed carefully.  Although Blair J.A. was considering the desirability of severing illegal interest from principal, the same factors are helpful in determining whether to reduce illegal interest to a legal level.

Since it is very difficult to identify the policy objective behind s.347 of the Criminal Code beyond the prevention of loansharking, violations of the section that clearly do not involve loansharking should be approached cautiously, keeping in mind that there is no need to deter, through the criminal law, effective interest rates of up to 60 percent per year.  Given that this was a commercial transaction engaged in by experienced and independently advised commercial parties, it is difficult to see why the choice of a 30.8 percent rather than 60 percent rate better fosters compliance with s.347 of the Criminal Code.

The second factor is whether the agreement was entered into for an illegal purpose or with an evil intention.   Concerns with specific and general deterrence are best addressed by the criminal law.  A prosecution under s.347 of the Criminal Code cannot be initiated without the consent of the Attorney General. This suggests that even a criminal remedy is not always appropriate for an infringement of s.347 of the Criminal Code, let alone a civil remedy seeking to promote the criminal law objective of deterrence.  This second consideration militates in favour of a flexible remedy.

The third factor concerns the relative bargaining positions of the parties and their conduct in reaching the agreement.  Each party had independent legal advice.  Each party was commercially experienced. The one failing seems to be that neither side realized that their agreement would contravene s.347 of the Criminal Code.  This third consideration, too, favours a flexible remedy.

Finally, any potential for an unjustified windfall arises from borrower possibly not having to repay the principal and interest, or from borrower possibly not having to pay a commercially appropriate rate of interest on the loan depends on each party having independent advice and knew precisely the obligations that they were taking on.

Interpretation of Statute by Courts

Section 12 of the Interpretation Act, R.S.C. 1985, c. I-21, provides:Every enactment is deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.

The SCC in Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC)held that “Throughout, it must be borne in mind that every statute is deemed remedial and is to be given such fair, large, and liberal construction and interpretation as best ensures the attainment of its object.  Statutory interpretation entails discerning Parliament’s intent by examining the words of a statute in their entire context and in their grammatical and ordinary sense, in harmony with the statute’s schemes and objects”.

The court cannot “do by ‘interpretation’ what Parliament chose not to do by enactment”:  But the converse is also true: courts may not undo by “interpretation” what Parliament chose to do by enactment as held in Canadian Broadcasting Corp. v. SODRAC 2003 Inc., 2015 SCC 57.

In Vector Financial Services v. Can-China Real Capital Inc., 2023 ONSC 4641 (CanLII),it has been held thatthe court will not construct agreements for parties: John D. McCamus, The Law of Contracts (Toronto: Irwin Law, 2020), at pp. 729-730. In terNeuzen v. Korn, 1995 CanLII 72 (SCC), [1995] 3 S.C.R. 674, at para. 94, the Supreme Court of Canada cited G. Ford Homes Ltd. V. Draft Masonry (York) Co., 1983 CanLII 1719 (ON CA), 43 O.R. (2d) 401 (C.A.), at para. 9 with approval, to state that it is a “time-honoured [caution]” that “…the courts will be cautious in their approach to implying terms to contracts. Certainly, a court will not rewrite a contract for the parties. As well, no term will be implied that is inconsistent with the contract.”

Mortgage Commitment

In Vector Financial Services v. Can-China Real Capital Inc., 2023 ONSC 4641 (CanLII), the court held that discussed the The Law of Contracts, 3rd ed. (Toronto: Irwin Law, 2020), at pp. 135-136, which explains the nature of the commitment letter as follows:Commitment letters are another type of preliminary agreement in common use. Commitment letters are issued by lenders in circumstances where a potential borrower wishes to know that it will be able to make certain future borrowings of a particular size and on particular terms in order to ensure that the project to be undertaken by the borrower is financially viable.In such circumstances, a lender may issue a commitment letter indicating a commitment to enter into a loan with the borrower on certain terms and conditions, it being understood that a formal lending agreement will be entered into at a later stage. In the typical case, it will be apparent from the terms of the commitment letter that a binding “commitment” is intended. Thus, it is a common feature of such arrangements that the borrower will be required to accept the commitment letter formally and to pay an initial commission or fee in return for the commitment. Provided that the parties have agreed to sufficient terms of the projected loan as to avoid the problem of lack of certainty of terms, commitment letters of this kind are held to be binding agreements. [Emphasis added.]

The Commitment Letter cannot be divorced from the loan documents. The Commitment Letter confirmed the terms of the projected mortgage loan to be secured on the two properties. The preamble of the Commitment Letter expressly states that it is to be read in conjunction with the Loan Document. The preamble reads:This Commitment shall be read in conjunction with the Loan Document (as defined in section 22). In the event of any inconsistency between the terms of this Commitment and the terms of any of the Loan Documents, the lender shall decide, in its sole discretion and its option, which shall prevail.

Onus to prove that contract is void, unenforceable or that any provision is illegal, void, unenforceable.

The onus to prove that any provision in the contract or that the contract itself is unenforceable is always upon the party asserting the same and generally it is the borrower who challenges the contract and as such the onus to prove is upon the borrower.

In Canadian General Electric Co. v. Canadian Rubber Co. (1915), 1915 CanLII 45 (SCC), 52 S.C.R. 349 followed in In Vector Financial Services v. Can-China Real Capital Inc., 2023 ONSC 4641 (CanLII), held that the onus of establishing that the clause is a penalty is on the respondent as the person seeking to set it aside: 

Mortgagor cannot ask for release of loan without fulfilling conditions precedent of advancement.

The mortgagor cannot call for payment until the conditions under which the funds have been advanced have been fulfilled.It is the prerogative of the lender to advance or not to advance the loan and to put conditions precedent to be fulfilled by the borrower prior to release of funds.

Rate of interest

The rate of interest to be charged is contractual, as agreed upon between borrower and the lender, however, cannot be charged more than 60% per annum as per section 2 and section 347 of Criminal Code. Rate of interest is fixed at the time of advancement and find mention in the registered charge over the real property. If no rate of interest is mentioned or stipulated, then the rate of interest is as per Interest Act, which at present is 5% per annum.

 Section 2 to 7 of Interest Act, which deals with rate of interest are reproduced as:

Rate of Interest

No restriction except by statute

2 Except as otherwise provided by this Act or any other Act of Parliament, any person may stipulate for, allow, and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on.

Interest rate when none provided.

3 Whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum.

When per annum rate not stipulated

4 Except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.

Recovery of sums paid otherwise.

5 If any sum is paid on account of any interest not chargeable, payable, or recoverable under section 4, the sum may be recovered back or deducted from any principal or interest payable under the contract.

Interest on Moneys Secured by Mortgage on Real Property or Hypothec on Immovables

No interest recoverable in certain cases

6 Whenever any principal money or interest secured by mortgage on real property or hypothec on immovables is, by the mortgage or hypothec, made payable on a sinking fund plan, on any plan under which the payments of principal money and interest are blended or on any plan that involves an allowance of interest on stipulated repayments, no interest whatever shall be chargeable, payable or recoverable on any part of the principal money advanced, unless the mortgage or hypothec contains a statement showing the amount of the principal money and the rate of interest chargeable on that money, calculated yearly or half-yearly, not in advance.

No rate recoverable beyond that so stated.

7 Whenever the rate of interest shown in the statement mentioned in section 6 is less than the rate of interest that would be chargeable by virtue of any other provision, calculation or stipulation in the mortgage or hypothec, no greater rate of interest shall be chargeable, payable, or recoverable, on the principal money advanced, than the rate shown in the statement.

Criminal Code

Criminal Code in Canada has put a cap for charging annual rate of interest exceeding 60% per annum on the credit advanced under an agreement or arrangement.  Section 2 of the Criminal code deals with definitions & Section 347 deals with punishment & fine for charging excess interest, which are reproduced as:

Section 2- In this section,

credit advanced means the aggregate of the money and the monetary value of any goods, services, or benefits actually advanced or to be advanced under an agreement or arrangement minus the aggregate of any required deposit balance and any fee, fine, penalty, commission and other similar charge or expense directly or indirectly incurred under the original or any collateral agreement or arrangement; (capital prêté)

criminal rate means an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds sixty per cent on the credit advanced under an agreement or arrangement; (taux criminel)

interest means the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit under an agreement or arrangement, by or on behalf of the person to whom the credit is or is to be advanced, irrespective of the person to whom any such charges and expenses are or are to be paid or payable, but does not include any repayment of credit advanced or any insurance charge, official fee, overdraft charge, required deposit balance or, in the case of a mortgage transaction, any amount required to be paid on account of property taxes; (intérêt)

Criminal interest rate

347 (1) Despite any other Act of Parliament, everyone who enters into an agreement or arrangement to receive interest at a criminal rate, or receives a payment or partial payment of interest at a criminal rate, is

(a) guilty of an indictable offence and liable to imprisonment for a term not exceeding five years; or

(b) guilty of an offence punishable on summary conviction and liable to a fine of not more than $25,000 or to imprisonment for a term of not more than two years less a day, or to both.

Rate of Interest for same principal secured by Promissory Note and Mortgage

Where the debt between the parties is secured by a promissory note that is itself secured by a mortgage, each for the same principal amount, and where payment of one is payment of the other, but where each contains different terms regarding post-default interest, the terms of the promissory note determine the applicable post-default interest rate as held in Pizzey Estate v. Crestwood Lake Ltd. (2004), 2004 CanLII 36108 (ON CA) followed in P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331, Benson Custodian Corporation v. Situ, 2019 ONSC 3077.

Remedy in Court

Where there are concerns about the amount claimed to discharge a mortgage, Rule 14.05(3)(e) of the Rules of Civil Procedure provides that an applicant may seek a judicial determination of all disputed items and provide evidence in support of its position. The judge will then determine the amount owing. A mortgage is a contract, and any fee or charge must be rooted in either an actual expense or something provided for in the mortgage. Charges provided for in the mortgage must be genuine pre-estimates of their losses.     

Defaults

No one wants to commit default in making the payments towards mortgage, but circumstances may result in doing so like loss of job, loss in business, some mishappening, unexpected expenses, hike in rate of interest particularly when the monthly instalments are based on flexible rate of interest. The lender is concerned about his money to be secured and on the other hand the borrower, who wants to pay back but is unable to do so owing to various reasons and on the other hand is worried about exaggerated charges being levied by the lender for default on the part of borrower and thus commencing the default proceedings to recover the mortgage amount.

The actual bone of contention is when the borrower makes the default in payment as per the mortgage commitment or contractual agreement resulting in commencement of default proceedings at the instance of lender & ancillary to this is when the borrower intends to clear the entire outstanding loan prior to due date or after the maturity date or after the commencement of default proceedings. As to what type of amounts/charges can be claimed in a mortgage loan against the charge on real property by the lender for default committed by borrower and what are the liabilities of borrower, if borrower wants to clear the entire outstanding loan prior to due date or after the maturity date or after the commencement of default proceedings is being canvassed in this article based on provisions of various enactments as analysed by the Canadian Courts of Law. The various charges, interest, fees which may or may not be charged/payable are discussed as:

Interest on arrears on maturity or default in making the payment of mortgage amount.

Parliament has singled out mortgages on real estate for special treatment, or at least treatment that differs from loans that are not secured on real property. At least one legislative purpose, which can be inferred was to protect the owners of real estate from interest or other charges that would make it impossible for owners to redeem, or to protect their equity. If an owner were already in default of payment under the interest rate charged on monies not in arrears, a still higher rate, or greater charge on the arrears would render foreclosure all but inevitable.

Parliament’s undoubted power to fix or limit rates of interest under any types of contracts or transactions extends to interest on arrears as well as to interest on principal payments as they fall due. Parliament is, in my view, entitled to require creditors to abstain from making or exacting a charge on arrears that goes beyond the rate of interest fixed for principal not in arrears and, in that respect, to prevent them from escaping the stricture through a designation of the charge as a fine or a penalty.

Rate of interest is the one fixed as per the contract and payable, if there is no default, however, any interest over and above the one initially fixed and payable on principal not in arrears amounts to exaggeration of interest and thus is prohibited as per the Interest Act. As such, the rate of interest fixed as per the mortgage agreement during the term of mortgage period do not amount to fine, penalty or rate of interest violating the provision of Section 8 of the Interest Act. To make it simple and understandable in plain language, if a mortgage is for a period of 12 months and the rate of interest is 12% per annum but with a clause that if the mortgage amount is not paid on the maturity date, the interest payable would be 15% per annum, then in the said eventuality, the default clause of paying interest @15% per annum violates the mandate of section 8 of the Interest Act and is unenforceable. However, if the mortgage term is 13 months and the mortgage agreement provides for rate of interest @12% per annum for first 12 months and thereafter for 13^th month as @15% per annum and thereafter the borrower defaults in making the payment, the interest @15% stipulated in the mortgage agreement is valid and cannot be said to be fine, penalty or rate of interest stipulated for taken, reserved or exacted on the arrears of principal or interest secured by mortgage, particularly, when the parties with open eyes and without there being any undue influence, pressure, force mutually entered into lawful agreement of mortgage. It is clear however that an interest rate increase triggered by the mere passage of time (and not by default), such as that imposed under the First Renewal Agreement, does not offend s. 8. The law regarding rate of interest to be charged on the arrears of principal or interest is now explained in terms of statue and the applicability of statute by the courts.

Section 8 to 10 of the Interest Act specifically deal with such situation and to effectively understand the basis, it is necessary to first read the exact words of the statute, which are reproduced as:

No fine, etc., allowed on payments in arrears.

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.

Interest on arrears

(2) Nothing in this section has the effect of prohibiting a contract for the payment of interest on arrears of interest or principal at any rate not greater than the rate payable on principal money not in arrears.

Overcharge may be recovered back.

9 If any sum is paid on account of any interest, fine or penalty not chargeable, payable or recoverable under section 6, 7 or 8, the sum may be recovered back or deducted from any other interest, fine or penalty chargeable, payable or recoverable on the principal.

When no further interest payable

10 (1) Whenever any principal money or interest secured by mortgage on real property or hypothec on immovables is not, under the terms of the mortgage or hypothec, payable until a time more than five years after the date of the mortgage or hypothec, then, if at any time after the expiration of the five years, any person liable to pay, or entitled to pay in order to redeem the mortgage, or to extinguish the hypothec, tenders or pays, to the person entitled to receive the money, the amount due for principal money and interest to the time of payment, as calculated under sections 6 to 9, together with three months further interest in lieu of notice, no further interest shall be chargeable, payable or recoverable at any time after the payment on the principal money or interest due under the mortgage or hypothec.

Exception

(2) Subsection (1) does not apply

(a) to any mortgage on real property or hypothec on immovables given by a joint stock company or any other corporation, nor to any debenture issued by them, for the payment of which security has been given by way of mortgage on real property or hypothec on immovables; or

(b) to any prescribed mortgage on real property or prescribed hypothec on immovables given by a prescribed entity, nor to any prescribed debenture issued by it, for the payment of which security has been given by way of mortgage on real property or hypothec on immovables.

Regulations

(3) For the purposes of paragraph (2)(b), the Governor in Council may, by regulation,

(a) prescribe entities; and

(b) prescribe classes of mortgages and hypothecs given by those entities and classes of debentures issued by them.

Section 8 of the Interest Act has been explained and applied by the courts in adjudication of dispute between the borrowers and lenders to the effect: –

Section 8 of the Interest Act prohibits charging of any fine, penalty or rate of interest over and above the rate of interest chargeable on the principal amount not in arrears. To attract the principle of Section 8 of the Interest Act, the first condition is that the principal or interest must be secured by mortgage on real property. The second condition is that there are arrears of principal or interest, which may be due to default in timely payment of interest or principal either on or before the maturity date. The third condition is that the demand amounts to fine, penalty or rate of interest over and above the rate of interest payable on principal not in arrears which has the effect increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

Section 8 of Interest Act stipulates thatno 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. Nothing in this section has the effect of prohibiting a contract for the payment of interest on arrears of interest or principal at any rate not greater than the rate payable on principal money not in arrears.

The Supreme Court of Canada in Tomell Investments Ltd. v. East Marstock Lands Ltd., 1977 CanLII 33 (SCC), upheld the validity of section 8 of the Interest Act and held thats. 8 of the Interest Actfocuses on the maximum charge that can be exacted from a debtor on arrears of principal or interest under a land mortgage by limiting it to the rate of interest payable on principal not in arrears. A charge, whether called or found to be a fine or penalty or rate of interest, which exceeds this limit is precluded .s. 8 of the Interest Act is valid federal legislation in respect of interest because, although it does not deal exclusively with interest in the strict sense of a charge accruing day by day, it is, insofar as it deals with other charges, a valid exercise of ancillary power designed to make effective the intention that the effective rate of interest over arrears of principal or interest should never be greater than the rate payable on principal money not in arrears.

The ONCA in Mastercraft Properties Ltd. v. El Ef Investments Inc., 1993 CanLII 8545 (ON CA) held that Fine or penalty are interchangeable terms. Each constitutes a form of monetary punishment for breach of the repayment terms of the mortgage contract. Mortgagees do not escape the operation of s. 8 by using the word “bonus” to describe something which is in substance a “fine” or “penalty.s.8 of the Interest Act to apply, the covenant must be a fine or penalty, which were interchangeable terms meaning a form of monetary punishment for breach of the repayment terms of the mortgage, and the covenant must have the prohibited effect.

The Court of Appeal in Headway Property Investments 78-1 Inc. v. Edgecombe Properties Ltd., 1998 CanLII 3546 (C.A.)held that  the Interest Act governs contractual relations between parties and has application where a claim is made under the terms of a mortgage .s.8 of the Interest Act can also apply in cases in which the prohibited charges are provided for in a debt instrument that evidences and secures a loan and that is secured by a mortgage on real property. Where, the debt instrument and the mortgage that secures it are for the same principal amount and provide for the same payment terms, and where payment of one is payment of the other, the mortgage is not a true collateral or accessory security; the two instruments secure repayment of the original or principal liability the single loan and s. 8 applies to both.

The British Columbia Court of Appeal in case reported as Reliant Capital Ltd. v. Silverdale Development Corp., 2006 BCCA 226,against which leave to appeal to S.C.C. refused [2006] S.C.C.A. No. 265,conducted a detailed review of the interest Act and its judicial interpretation and considered the purpose of the prohibition contained in s. 8. The court emphasized, that ss.6 to 10 of the Interest Act “relate exclusively to interest charges on loans secured by mortgages on real property”. In that context, the court explained that s. 8 is intended to “protect property owners against abusive lending practises, while recognizing that generally speaking parties are entitled to freedom of contract”: It is not uncommon now in the commercial world for loan contracts, other than mortgage loans, to require a substantially higher interest rate if the loan becomes in arrears. Common sense suggests that this is recognized as a legitimate and effective way to ensure the prompt or timely repayment of the loan.

The prohibition against extra charges on arrears remains in place for loans secured by a mortgage. Moreover, the additional charge on arrears is prohibited in mortgage loans whether that charge is expressed as such, or whether the interest provision simply has “the effect” of increasing the charge in respect of arrears.

Thus, s. 8 creates an exception to the general rule that lenders and borrowers are free to negotiate and agree on any rate of interest on a loan. Section 8 prohibits lenders from levying “fine[s], penalties or rate[s] of interest” on “any arrears of principal or interest” that are “secured by mortgage on real property”.

There are several prerequisites to the application of s. 8 of the Interest Act. First, s. 8 requires a finding that the covenant in question imposes a “fine”, “penalty” or “rate of interest “. If it does not, then s. 8 is not engaged.

Second, the “fine”, “penalty” or “rate of interest ” must relate to “any arrears of principal or interest secured by mortgage on real property” (emphasis added). The arrears may arise on default occurring before or after maturity of the relevant debt instrument relied upon law laid down in Beauchamp v. Timberland Investments Ltd. 1983 CanLII 1816 (ON CA), 

Third, assuming that the covenant stipulates for a “fine”, “penalty” or “rate of interest “, the covenant must also have the prohibited effect of “increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears”. In other words, the covenant “must both stipulate for a ‘fine’, ‘penalty’ or ‘rate of interest and have the prohibited effect”: 

Finally, the arrears of principal or interest must be “secured by mortgage on real property”.Given the protective purpose of s. 8 of the Interest Act, in what circumstances is the section triggered? 

In this case, the petitioner maintains that the interest provisions of the mortgage increasing the rate from 14% to 20% one month before the mortgage loan became due in full is not prohibited by s. 8 of the Interest Act.  Counsel says the interest clause is not a “penalty” because it was not “triggered by default”.  The increased rate became payable as of a fixed date, regardless of whether payments owing under the mortgage were in default or not.

The borrowers, as experienced business persons, must be taken to have accepted that risk assessment as in accord with what could be obtained in a competitive marketplace.

A clause providing for an increase in the interest rate on a mortgage loan does not offend s. 8 of the Interest Act unless the increase is “triggered” by default in making payments as required by the agreement.  In other words, unless the increase is tied to, or precipitated by default, s. 8 is not engaged.

the clause does not offend s. 8 because it does not stipulate for an increased rate payable on arrears “beyond the rate of interest payable on principal monies not in arrears”.  The increased interest rate payable after twelve months and twenty-two days applies to all monies owing under the loan whether in arrears or not.

The line should be drawn between interest provisions which are intended to extract a higher rate of interest in the event of default and interest provisions which have a legitimate commercial purpose. The true intent may be obfuscated by clever devices designed by ingenuous lawyers, and it will be the function of the Court to determine the true intent.

The legitimate commercial purpose test is an unnecessary and unhelpful gloss on s. 8.  The thrust of the section, applying a purposive approach and having regard for equity’s rejection of penalty clauses in mortgage contracts, the history of the legislation, and a contextual reading of the language used in s. 8, is, in Mary Anne Waldron’s words “… to protect the borrowing public from … abusive treatment by lenders”, or in the words of Chief Justice McEachern “… to protect borrowers against penalties and oppression at the hand of a ruthless lender”.

Thus the court held that the interest rate increase in the mortgage is not prohibited by s. 8 of the Interest Act; and the interest increase in the mortgage is valid and enforceable, and payable by the borrowers to the petitioner.

The ONCA in P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331 (CanLII) agreed with the law laid down in Reliant Capital Ltd. v. Silverdale Development Corp held that in order to consider the applicability of Section 8 of the Interest Act,First, requires a finding that the covenant in question imposes a “fine”, “penalty” or “rate of interest”. If it does not, then s. 8 is not engaged.

Second, the “fine”, “penalty” or “rate of interest” must relate to “any arrears of principal or interest secured by mortgage on real property”. The arrears may arise on default occurring before or after maturity of the relevant debt instrument.

Third, if the covenant stipulates for a “fine”, “penalty” or “rate of interest”, the covenant must also have the prohibited effect of “increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears”. In other words, the covenant “must both stipulate for a ‘fine’, ‘penalty’ or ‘rate of interest’ and have the prohibited effect”: 

Finally, the arrears of principal or interest must be “secured by mortgage on real property”.

The interest escalation provision concerns a “rate of interest” relating to arrears of principal or interest under the Note arising on default, before and after the date of maturity.

The Interest Act governs contractual relations between parties and has application where a claim is made under the terms of a mortgage”

The terms of the Note determine the post-default rate of interest payable on the one debt between the parties. And the Note is secured by a mortgage on real property. Consequently, given the agreed-upon structure of this loan transaction, both instruments fall within the ambit of s. 8 of the Interest Act on the facts of this case.

In the said case, the court held that the interest agreed upon was 0.75% and the interest @10% payable on default as mentioned in the promissory note violate s.8 of the interest Act. Further the three months interest payable on default has been acknowledged by the borrower. The NSF charges @ $300.00 and late fee $10.00 amounts to escalation of interest as no evidence on the record was proved before the court demonstrating that the lender incurred any actual losses as a result of late or missed payments under the Mortgage, apart from the amount of the non-payment itself. The pre-judgement and post judgement interest was awarded as was prior to default.

In Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18 (CanLII), [2016] 1 SCR 273,the Supreme Court of Canada held that the ordinary sense of the words that Parliament chose to include in s. 8, read together with s. 2 and considered in light of the Act’s objects, supports the conclusion that s. 8 applies both to discounts (incentives for performance) as well as penalties for non-performance whenever their effect is to increase the charge on the arrears beyond the rate of interest payable on principal money not in arrears.  Section 8 of the Interest Act applies with equal force to mortgage terms imposing by way of penalty a higher rate in the event of default and reserving by way of discount a lower rate in the event of no default. It follows that the 25 percent per annum rate of interest set by the Second Renewal Agreement is void. The interest rate in force under the Second Renewal Agreement as of February 1, 2009, shall be set at the higher of 7.5 percent and the prime interest rate plus 5.25 percent.

The ONCA in Benson Custodian Corporation v. Situ, 2019 ONSC 3077 held that the arrears of principal and interest in question are “secured by [a]  mortgage on real property” and that s. 8 of the Interest Act therefore applies to the debt instruments entered into by the parties, including the Note. It follows that, because the interest Escalation Provision applies to arrears that are secured by a mortgage within the meaning of s. 8, and because it has the effect of increasing the rate of interest charged on the arrears beyond the pre-default interest rate payable on the principal amount of the Note, the interest Escalation Provision violates the statutory prohibition in s. 8 of the Interest Act and is ineffective.

In the said case, the plaintiff sought $3,000 for the administrative charges arising from the notice of sale ($1,500) and the filing of a statement of claim ($1,500), and $21,750 as a sum equalling three months interest on the principal outstanding.

The court disallowed the claim of three months interest but allowed the claim of administrative charges and held that an agreement on a fixed fee arising from issuance of a notice of sale or the issuance of a statement of claim does not strike me as a fine or penalty, nor is it, of course, a rate of interest. Rather, these amounts, including the legal fees, address some of the costs anticipated by and associated with enforcing a mortgage that may be incurred in the event of default.

In, Elle Mortgage Corporation v. Sihota, 2021 ONSC 1593 (CanLII), it has been held that the right to renew the mortgage in this case is one vested solely in the mortgagee.  It does not in any way depend upon the assent or even the knowledge of the mortgagors at the time of renewal. The trigger that gives rise to the mortgagee’s renewal right is the existence of arrears of principal. The mortgagors had the undoubted right to repay the mortgage up until the last instant provided for payment and until the expiry of that instant, the mortgagee had no right to compel renewal. Since the right to renew does not exist unless the mortgage is not repaid and repayment can occur until the last instant payment is both due and permitted to be made, the mortgagee’s renewal right does not come into being until payment has not been made in the requisite time and the mortgage is – for that instant at least – in arrears. The fact that the mortgage deems extension to have occurred at that point of time does not detract from the fact that a condition precedent to renewal and the obligation to pay higher fees was the existence of unpaid arrears of principal.  Permitting the mortgagee to throw sand in the gears of the mortgagors’ attempts to refinance this mortgage with unjustified demands and then to be rewarded for this by the payment of three months’ interest would appear to turn the objects of the Legislature on its head. What was designed as a shield to protect the mortgagors is instead wielded as a sword against them by the mortgagee to exact what in these circumstances amounts to a penalty.  

The court held that the terms in a mortgage that deem an “automatic renewal” at substantially higher cost in the sole discretion of the mortgagee are not enforceable, allowed the 3 month’s compensation for non-payment at maturity, allowed a fee of $500 plus HST as a reasonable fee to prepare the discharge for a total of $565.

In Vector Financial Services v. Can-China Real Capital Inc., 2023 ONSC 4641 (CanLII),the court held thatsince s. 8 of the Interest Act is an exception to the right of parties to contract, the fact that the parties were sophisticated commercial parties who had the benefit of legal advice is not relevant as these factors would clearly defeat the consumer protection purpose of the provision. The Ontario Court of Appeal thus indicated that section 8 created an exception to the general rule that  lenders and borrowers are free to negotiate and agree on any rate of interest on the loan: 

Bonus-Discount-Incentives for performance and Non-Performance

Bonuses are contractually payable when a mortgagor pays off a mortgage early have been said to be designed to compensate the mortgagee for, among other things, the loss of the opportunity to earn the agreed-upon rate of  interest for the entire mortgage period: C.M.T. Financial Corporation v. McGee, 2015 ONSC 3595

In Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, it has been held that: The ordinary sense of the words that Parliament chose to include in s. 8, read together with s. 2 and considered in light of the Act’s objects, supports the conclusion that s. 8 applies both to discounts (incentives for performance) as well as penalties for non‑performance whenever their effect is to increase the charge on the arrears beyond the rate of interest payable on principal money not in arrears. By directing the inquiry to the effect of the impugned mortgage term, Parliament clearly intended that mortgage terms guised as a “bonus”, “discount” or “benefit” would not as such comply with s. 8. Substance, not form, is to prevail. What counts is how the impugned term operates, and the consequences it produces, irrespective of the label used. If its effect is to impose a higher rate on arrears than on money not in arrears, then s. 8 is offended. Section 8 of the Act identifies three classes of charges — a fine, a penalty or a rate of interest — that shall not be stipulated for, taken, reserved or exacted, in a mortgage agreement, if the effect of doing so imposes a higher charge on arrears than that imposed on principal money not in arrears. Section 2 of the Act preserves a general right of freedom to contract for any rate of interest or discount, with the caveat that such freedom is subject to what is otherwise provided for by this Act.Had Parliament intended to prohibit only penalties (and not discounts), it would not have included a “fine” or a “rate of interest”, in addition to a “penalty”, as a type of charge that might also be prohibited:Section 8 must also be read in light of, and harmoniously with, s. 2. s. 2 preserves a general right of freedom to contract for “any rate of interest or discount”, with the caveat that such freedom is subject to what is “otherwise provided by this Act or any other Act of Parliament”. Section 2 is therefore subject to the restriction imposed by s. 8 upon the rate of interest on a loan secured by a mortgage: It is understandable that courts would develop such a technique to infuse s. 8 with what they might see as reflecting reasonable commercial expectations: Doing so is, however, incompatible with s. 8. Part of the difficulty with the legitimate commercial purpose test is that, as Finch C.J.B.C. observed in Reliant Capital (at para. 87), it leads to commercial uncertainty and to s. 8’s arbitrary application. More fundamentally, inquiring into the “legitimacy” of the purpose underlying an arrangement that offends s. 8 not by its purpose but by its effect undermines Parliament’s clearly expressed intent. The same objection also applies to any attempt, whether achieved by “strict” construction or by focusing on other irrelevant considerations under s. 8 such as the relative degrees of sophistication or bargaining power between the parties, to derogate from the purely results-oriented focus that s. 8 expressly requires. The ordinary sense of the words that Parliament chose to include in s. 8, read together with s. 2 and considered in light of the Act’s objects, supports the conclusion that s. 8 applies both to discounts (incentives for performance) as well as penalties for non‑performance whenever their effect is to increase the charge on the arrears beyond the rate of interest payable on principal money not in arrears. By directing the inquiry to the effect of the impugned mortgage term, Parliament clearly intended that mortgage terms guised as a “bonus”, “discount” or “benefit” would not as such comply with s. 8. Substance, not form, is to prevail. What counts is how the impugned term operates, and the consequences it produces, irrespective of the label used. If its effect is to impose a higher rate on arrears than on money not in arrears, then s. 8 is offended.It is clear however that an interest rate increase triggered by the mere passage of time (and not by default), such as that imposed under the First Renewal Agreement, does not offend s. 8. With respect to the Second Renewal Agreement, its effect is to reserve a higher charge on arrears (25 percent) than that imposed on principal money not in arrears (7.5 percent, or the prime interest rate plus 5.25 percent). The labelling of one charge as an “interest rate” and the other as a “pay rate” is of no consequence, given s. 8’s explicit concern for substance over form. It follows that the 25 percent per annum rate of interest set by the Second Renewal Agreement is void. The interest rate in force under the Second Renewal Agreement as of February 1, 2009, shall be set at the higher of 7.5 percent and the prime interest rate plus 5.25 percent.In the instant case, the Second Renewal Agreement, viewed in light of the circumstances in which it was agreed upon, provided Lougheed with a less onerous path to fulfill its payment obligations that were then due under the First Renewal Agreement. Holding that the 25 percent interest rate provided for in the Second Renewal Agreement is invalid would not give effect to Parliament’s protective purpose; rather, it would reward Lougheed with an unmerited windfall, while Equitable Trust would be denied the interest charges due to it under its agreement even though it has not benefited from prompt payment.

Administrative Costsand legal fees

The administrative costsand legal feescannot be said to be fine, penalty or rate of interest stipulated for taken, reserved, or exacted on the arrears of principal or interest secured by mortgage, however these should be real costs incurred by the lender. The said costs and legal fees should be reasonable and if contested can be assessed by the assessment officer under the mortgagees Act.

With respect to administrative costs, while a mortgagee is generally entitled to be indemnified for costs incurred to respond to default, the costs must be reasonable and properly incurred. There must be some evidentiary basis to determine the costs were incurred at the amounts claimed. Absent proof, costs are subsumed in the ordinary course of the mortgagee’s business. Claims for costs reimbursement in mortgage enforcement are susceptible to abuse. Service providers who know that their lender clients will pass on their invoices to their borrowers may be incentivized to charge above-market rates. absence evidence that the charges reflect real costs legitimately incurred for the debt recovery, administrative charges merely impose an additional penalty or fine.

Section 43(2) of the Mortgages Act requires that if there is a dispute as to the “costs payable” by the person or on whose behalf such payment is either made or tendered, such costs, shall be …assessed by an assessment officer. The requirement found in s. 43 (2) of the Act that requires that costs be assessed applies only to the party “byor on whose behalf such payment is either made or tendered”.Section 43(4) provides that a “mortgagee’s costs of and incidental to the exercise of a power of sale, whether under this Part or otherwise, may, without an order, be assessed by an assessment officer at the instance of any person interested. Where there is a dispute regarding the payment of costs involving “any other interested party” as per section 43(4), costs may be assessed.

Unproven and/or unsubstantiated charges are consistently disallowed by the Court as offending s. 8 of the Interest Act. Legal fees are no exception. Absent evidence that the charges reflect real costs, any charges, including legal fees, may be reduced, or disallowed on an application under Rule 14.05 (3) (e) for the settling of charges.

In2642322 Ontario Inc. v. Rexell Developments Inc.,2023 ONSC 1979, the court held that The Notice of Sale is a two-page standard document that would have taken a short time to prepare, serve and file. Considering the length and complexity of the document, the appropriate legal fees for preparation of the Notice of Sale are fixed at $1000.00 plus HST. Objection Partially Upheld (-$1,475).

In 1427814 Ontario Ltd v. 3697584 Canada Inc., 2004 CanLII 16681 (ON SC), it has been held that the mortgagee is entitled to indemnification of all its costs and expenses reasonably and properly incurred in ascertaining, asserting, and defending its rights in connection with the mortgage debt. The Mortgages Act does not provide for the payment from the proceeds of sale of amounts of interest and costs or principal not yet due. It clearly does not contemplate that the surplus can be held as security for costs or principal that arises after the sale. To interpret the terms as providing the mortgagee with the right to retain the surplus indefinitely until outstanding or future proceedings are determined is contrary to section 27 of the Mortgages Act and is not provided for in the language of the charge terms. On the contrary, the language in section 8 of the charge terms states that costs become a charge upon the land. Neither section 8 nor section 9 provide that the costs are a charge upon the proceeds of the sale of the land under power of sale. Explicit language would be necessary to override the provisions of the Mortgages Act and to permit a mortgagee to hold a significant amount of money for an indeterminate and likely lengthy period of time while the legal proceedings are resolved. If the mortgagee wishes to seek security for costs, it must rely upon the rules of practice and not its mortgage.

In P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331 (CanLII), it has been held that a Mortgagee is not permitted to charge administrative costs that do not reflect real costs incurred in the administration of the mortgage. Such fees are invalid.  In the absence of evidence that the charges in question reflect real costs legitimately incurred by the lenders for the recovery of the debt, in the form of actual administrative costs or otherwise, the only reason for the charges was to impose an additional penalty or fine, apart from the interest otherwise payable under the Mortgage, thereby increasing the burden on the appellants beyond the rate of interest agreed upon in the Mortgage.

In Walia v. 2155982 Ontario Inc., 2019 ONSC 1059 (CanLII), the court declared the renewal agreement to be not enforceable, declared the term increasing the rate of interest as invalid but allowed the administrative fee of $4,500.00 added pursuant to default in making the mortgage on due date.

In Benson Custodian Corporation v. Situ, 2019 ONSC 3077, BMMB Investments Limited v. Naimian, 2020 ONSC 799, it has been held that as the administrative and legal fees are intended to reimburse the plaintiff for expenses incurred arising from the default, however, those are permissible. An agreement on a fixed fee arising from issuance of a notice of sale or the issuance of a statement of claim does not strike as a fine or penalty, nor is it, of course, a rate of interest. Rather, these amounts, including the legal fees, address some of the costs anticipated by and associated with enforcing a mortgage that may be incurred in the event of default.

In Roopchand v. Ghuman, 2021 ONSC 3163 (CanLII), the court held that the administrative costs and the legal fees can be assessed by an Assessment Officer pursuant to the Mortgages Act.

In NRD Management Services Ltd. v. Dorothy Litwin, 2021 ONSC 3238 (CanLII), it has been held that legal fees must be reasonable and are subject to the Court’s overriding discretion with respect to costs. The court allowed $625.00 as NSF Charges, Statement preparation fee as $$1,250.00, Discharge Fee as $750.00, Demand letter cost as $350.00, Default proceedings fee $2,250.00 and legal fee as $9010.81.

Pre-payment

In 1539339 Ontario Inc. v. First Source Financial Management Inc., 2020 ONSC 5082, it has been held that the mortgages are secured loans and loans are contractual agreements.  Under a loan agreement, the borrower is entitled to the use of the lender’s capital for some stipulated period of time.  The lender is entitled to a stream of interest income and to the ultimate repayment of its capital. The words used in mortgages, like words used in any other contract, “do not have an immutable or absolute meaning.” While the ordinary meaning of the word “prepay” suggests a payment that is made in advance, the use of the word “prepayment” in the context of a loan is often linked to a reduced amount of interest being paid/charged with respect to the loan as a result of the early payment.

Three Months Interest for non-payment on maturity date or prior to maturity date

Section 8 of Interest Act stipulates thatno 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. Nothing in this section has the effect of prohibiting a contract for the payment of interest on arrears of interest or principal at any rate not greater than the rate payable on principal money not in arrears.

Thus, charging of three months interest by the lender on default by the borrower in making the payment of amount due under the mortgage either prior to maturity date or after the maturity date violates the mandate of section 8 of the Interest Act and is unenforceable. However, if the mortgagor intends to pay back the mortgage amount either before or after the maturity date, the borrower/mortgagor has to give three months notice to the mortgagee and in case wants to pay off the mortgage amount prior to three months notice, then in that eventuality, the mortgagor/borrower has to pay three months interest and the lender can validly ask for three months interest.if the mortgagee takes steps to realize on the mortgage, the mortgagee is only entitled to interest actually owing on the principal and not an additional three months as set out in s. 17 of the Mortgages Act, however, if the mortgagor wants to pay back the mortgage amount either prior to maturity date or afterwards, in that case, the mortgagor has to give three months notice to the mortgagee or to pay three months interest in Liew thereof.

To understand the position, it would be necessary to go through the statute and its applicability by the courts.

Section 17 of the Mortgage Act reads as:

Payment of principal upon default

17 (1)  Despite any agreement to the contrary, where default has been made in the payment of any principal money secured by a mortgage of freehold or leasehold property, the mortgagor or person entitled to make such payment may at any time, upon payment of three months interest on the principal money so in arrear, pay the same, or the mortgagor or person entitled to make such payment may give the mortgagee at least three months notice, in writing, of the intention to make such payment at a time named in the notice, and in the event of making such payment on the day so named is entitled to make the same without any further payment of interest except to the date of payment.

Exception

(2)  If the mortgagor or person entitled to make such payment fails to make the same at the time mentioned in the notice, the mortgagor or person is thereafter entitled to make such payment only on paying the principal money so in arrear and interest thereon to the date of payment together with three months interest in advance.

Saving

(3)  Nothing in this section affects or limits the right of the mortgagee to recover by action or otherwise the principal money so in arrear after default has been made.  R.S.O. 1990, c. M.40, s. 17.

Section 16 of the Mortgage Act for Ontario reads as:

16(1) Notwithstanding any agreement to the contrary, where default has been made in the payment of any principal money secured by a mortgage of freehold or leasehold property, the mortgagor or person entitled to make such payment may at any time, upon payment of three months interest on the principal money so in arrear, pay the same, or he may give the mortgagee at least three months notice, in writing, of his intention to make such payment at a time named in the notice, and in the event of his making such payment on the day so named he is entitled to make the same without any further payment of interest except to the date of payment.

Section 8 of the interest Act read with section 17 of the Mortgages Act came up for consideration before SCC in Tomell Investments Ltd. v. East Marstock Lands Ltd., 1977 CanLII 33 (SCC), where the clause in the mortgage commitment providing for payment of three months interest on default and validity of section 8 of the interest Act was debated and decided. The clause in mortgage commitment read as:

“PROVIDED also that on default of payment of any of the moneys hereby secured or payable or on any proceedings being taken by the Mortgagee under this Mortgage, he shall be entitled to require payment, in addition to all other moneys hereby secured or payable hereunder, of a bonus equal to three months’ interest in advance at the rate aforesaid upon the principal money hereby secured, and the Mortgagor shall not be entitled to require a discharge of this Mortgage without such payment.”

As far as payment of three months interest on default, the SCC held as “In my opinion, if East Marstock Lands Limited is required to pay a bonus equal to three months’ interest, such payment would have the effect of increasing the charge on the arrears beyond the rate of interest payable on the principal. In this case, the interest payments are approximately six months in arrears. For the sake of illustration, I propose to assume that the interest payments are in arrears for six months. The arrears of interest therefore amount to $36,000.00. A bonus equal to three months’ interest on the principal money amounts to $18,000.00. The bonus therefore amounts to 50% of the arrears. The rate of interest payable upon principal money is 16%. It is my opinion therefore that the bonus clause in this mortgage has the effect of increasing the charge on arrears of interest beyond, and substantially beyond, the rate of interest payable on principal money, and therefore is in violation of Section 8 of the Interest Act.”

The matter regarding payment of three months interest on default by interpreting the clauses in the mortgage commitment came up for hearing before the ONCA in Mastercraft Properties Ltd. v. El Ef Investments Inc., 1993 CanLII 8545 (ON CA), (Applications for leave to appeal to the Supreme Court of Canada dismissed with costs). The clauses in the respective mortgage agreements, which were under consideration before the court reads as:

[In Mastercraft] — And the said Mortgagor covenants with the Mortgagee that in the event of non-payment of the said principal moneys at the time or times above provided, he shall not require the Mortgagee to accept payment of the said principal moneys without first giving three months’ previous notice in writing or paying a bonus equal to three months’ interest in advance on the said principal moneys.

[In Peace Valley] — And the Chargor covenants with the Chargee that in the event of non-payment of the principal amount at the time or times provided in the charge, then he shall not require the Chargee to accept payment of the principal amount without first giving three months’ notice in writing or paying a bonus equal to three months’ interest in advance on the principal amount.

The court held thats. 8 does not deal with covenants requiring the giving of notice before paying off a mortgage debt which is in arrears.What s. 8 interdicts is a “fine, penalty or rate of interest. . . on arrears of principal or interest” which has the prohibited effect of “increasing the charge on the arrears beyond the rate of interest” payable under the mortgage. A clear reading of the section requires that unless one first finds a “fine”, “penalty”, or “rate of interest” charged on “arrears of principal or interest” it is unnecessary to consider whether the charge involved has the prohibited effect. In other words, the covenant must both stipulate for a “fine”, “penalty” or “rate of interest” and have the prohibited effect, “fine” or “penalty” are interchangeable terms in this context: Each constitutes a form of monetary punishment for breach of the repayment terms of the mortgage contract. In the covenants involved here, the payment is referred to as a “bonus”, which is not prohibited by s. 8. It is obvious, of course, that mortgagees do not escape the operation of s. 8 by using the word “bonus” to describe something which is in substance a “fine” or “penalty”. However, in these appeals, the “bonus” stipulated for is not an amount paid in punishment for a breach of the mortgage contract, but is a payment required for the privilege of paying arrears without the necessity of giving the three months’ notice contracted for. It is not, therefore, a “fine” or “penalty”.In the Gullett case, as in the cases under appeal, the mortgagor, by agreeing to the covenant in question, was not contracting to pay a “fine, penalty or rate of interest” which would have the prohibited effect. What he contracted to do was to pay the mortgage when due or, if not, to give the mortgagee three months’ notice of his intent to pay. The obvious purpose of such a stipulation is to give the mortgagee the benefit, when the mortgagor defaults, of a reasonable period during which to arrange for the alternate investment of its funds when the mortgagor does finally retire the mortgage. If the mortgagor wishes (obviously for its own benefit) to retire the mortgage at a date earlier than the termination of the three months’ notice period, it has the contractual right to do so, but must pay for that right in an amount equal to three months’ interest. In my view, such a contractual arrangement is not what is contemplated by s. 8 of the Interest Act. Had the covenant in question required the payment of interest during the notice period plus an additional amount equivalent to three months’ interest, then the provision, and its attempted enforcement, would clearly have been contrary to s. 8. However, if three months’ notice of payment were given by the mortgagor, he would merely pay interest at the mortgage rate during the three-month period, and at the end of the period he would be entitled to a discharge upon payment of all arrears. If he wished a discharge at any time after default without giving notice, he would have to pay all arrears of principal and interest plus a charge equal to three months’ interest for the privilege of being allowed to pay the arrears without giving the agreed three months’ notice. The right of a mortgagor under s. 10 of the Interest Act or s. 17 of the Mortgages Act is a statutory right, and the covenants in question are matters of contract between the parties. In my view, however, no real issue arises from that distinction, since no statutory provision prohibits such covenants; indeed, s. 16 of the Mortgages Act incorporates a similar provision into all Ontario mortgages.

The obvious purpose of such a stipulation is to give the mortgagee the benefit, when the mortgagor defaults, of a reasonable period during which to arrange for the alternate investment of its funds when the mortgagor does finally retire the mortgage. If the mortgagor wishes (obviously for its own benefit) to retire the mortgage at a date earlier than the termination of the three months’ notice period, it has the contractual right to do so, but must pay for that right in an amount equal to three months’ interest. In my view, such a contractual arrangement is not what is contemplated by s. 8 of the Interest Act. Had the covenant in question required the payment of interest during the notice period plus an additional amount equivalent to three months’ interest, then the provision, and its attempted enforcement, would clearly have been contrary to s. 8. However, if three months’ notice of payment were given by the mortgagor, he would merely pay interest at the mortgage rate during the three-month period, and at the end of the period he would be entitled to a discharge upon payment of all arrears. If he wished a discharge at any time after default without giving notice, he would have to pay all arrears of principal and interest plus a charge equal to three months’ interest for the privilege of being allowed to pay the arrears without giving the agreed three months’ notice.Mastercraft Properties Ltd. v. El Ef Investments Inc., 1993 CanLII 8545 (ON CA).

By its terms, the provisions of s. 16 are incorporated into every mortgage in Ontario and override any contrary provision in the mortgage. Section 16 gives a mortgagor a right, when in default of payment of principal, to repay that principal on giving three months’ notice to the mortgagee of his intention to pay and protects him from any further payment of interest except to the date of payment. Such interest would merely constitute payment for the use of the principal during the notice period. The provision protects the mortgagor by permitting payment of arrears without penalty, or by permitting early redemption at a price. It protects the mortgagee by giving him a three-month period during which to arrange for reinvestment of his principal, or monies to compensate for lack of that notice. The option is that of the mortgagor.Covenants which go beyond what is provided for in s. 16 of the Mortgages Act may well run afoul of s. 8 of the Interest Act. However, that does not affect the constitutional validity of s. 16, or the enforceability of covenants which do not go beyond its provisions. In my view, covenants which provide the protection intended by s. 16 are in harmony rather than in conflict with the provisions of s. 8. Both enactments can stand as constitutionally valid federal and provincial law.

The court finally held that the plaintiff/mortgagee is not entitled to the additional three months of  interest, as it is prohibited under s. 8 of the Interest Act.  s. 17 of the Mortgages Act, which provides that a mortgagor in default can pay three months interest on the principal in order to be discharged. However, if the mortgagee takes steps to realize on the mortgage, the mortgagee is only entitled to interest owing on the principal and not an additional three months. I conclude that the arrears of principal and interest in question are “secured by [a] mortgage on real property” and that s. 8 of the Interest Act therefore applies to the debt instruments entered into by the parties, including the Note. It follows that, because the Interest Escalation Provision applies to arrears that are secured by a mortgage within the meaning of s. 8, and because it has the effect of increasing the rate of interest charged on the arrears beyond the pre-default interest rate payable on the principal amount of the Note, the Interest Escalation Provision violates the statutory prohibition in s. 8 of the Interest Act and is ineffective. s. 8 is applicable here and the three months’ interest provision is invalid and unenforceable. With respect to the administrative and legal fees, as these fees are unconnected to the principal amount, they are of a different character than the three months’ interest. An agreement on a fixed fee arising from issuance of a notice of sale or the issuance of a statement of claim does not strike me as a fine or penalty, nor is it, of course, a rate of interest. Rather, these amounts, including the legal fees, address some of the costs anticipated by and associated with enforcing a mortgage that may be incurred in the event of default.

In Lee v. He, 2018 ONSC 5932, A mortgage with a one-year term was not paid on maturity, and the mortgagors disputed fees the mortgagee insisted be paid to discharge the mortgage.  The mortgagors brought an application to obtain a discharge of the mortgage.  Boswell J. noted the purpose of s. 17 of the Mortgages Act ceases to make sense when a mortgage goes into default after maturity, at paras 26 – 27:“Providing that a mortgagor in default may redeem the mortgage on the payment of three months interest, or on the provision of three months notice, serves to cap the damages payable for the mortgagee’s lost income stream, while concurrently fixing the mortgagee’s responsibility to mitigate its losses.  In effect, it is afforded three months to reinvest its capital.The rationale behind s. 17 ceases to make sense when a mortgage goes into default after maturity.  In that circumstance, the lender has already received (or is entitled to receive) the whole of the income stream contracted for.  The three months bonus interest would, in such circumstances, be nothing more than a penalty, something it was not intended to be.

In Benson Custodian Corporation v. Situ, 2019 ONSC 3077, it has been held by relying upon law laid down in 58 Cardill Inc. v. Rathcliffe Holdings Limited, 2017 ONSC 6828 upheld in 58 Cardill Inc. v. Rathcliffe Holdings Limited, 2018 ONCA 672, Gullett v. Income Trust Co. (1985), 37 R.P.R. 123 (Ont. C.A.), Mintz (In Trust) v. Mademont Yonge Inc., 2010 ONSC 116, Mastercraft Properties Limited v. EL EF Investments Inc. (1993), 1993 CanLII 8545 (ON CA).  Section 17 of the Mortgages Act is available to a mortgagor in the event of default or in repayment of a mature mortgage .Section 17 operates as a shield to the mortgagor to allow for payment of arrears without imposition of three months’ interest when three months’ notice is provided. The benefit to the mortgagee by giving three months’ notice of repayment is that it can plan the reinvestment of the funds that it anticipates receiving on repayment, or receive a lump sum of three months’ interest in lieu thereof: the Three-Month Interest Provision does not constitute a penalty or fine, because it requires only the payment of three months’ interest when this interest is not paid during the notice period, and is therefore a valid and enforceable mortgage term. The obvious purpose of such a stipulation is to give the mortgagee the benefit, when the mortgagor defaults, of a reasonable period during which to arrange for the alternate investment of its funds when the mortgagor does finally retire the mortgage. If the mortgagor wishes (obviously for its own benefit) to retire the mortgage at a date earlier than the termination of the three months’ notice period, it has the contractual right to do so, but must pay for that right in an amount equal to three months’ interest. … If he wished a discharge at any time after default without giving notice, he would have to pay all arrears of principal and interest, plus a charge equal to three months’ interest, for the privilege of being allowed to pay the arrears without giving the agreed three months’ notice. [Emphasis added.]

In BMMB Investments Limited v. Naimian, 2020 ONSC 799 held that lenders may lawfully recoup from mortgagors who are in default of their payment obligations the administrative costs incurred by the lenders caused by the defaults. The common law recognizes that for good business reasons such costs can be estimated in advance and fixed in a contract. But fees and charges levied on a mortgage default that are not genuine pre-estimates of costs actually incurred by a lender are penalties that can be void at common law and may violate the statute. A lender who wishes to compete may want to reduce its interest rate by excluding some of its extraordinary costs and then charge those costs specifically only to those borrowers whose defaults cause those costs to be incurred. That is perfectly legitimate. But in that case, it behooves the lender to be able to prove with evidence that it incurred the costs that it seeks to charge to the individual borrowers. Absent proof of specific costs being incurred, the costs are rightly subsumed in its ordinary costs of doing business. There is no basis for a fee for late payments of monthly instalments of blended principal and interest after the mortgage matured. s. 17 of the Mortgages Act, RSO 1990 c M.40allows a borrower who is in default to repay the principal of the mortgage despite any terms of the mortgage that may provide otherwise. This is a special provision designed to help defaulting mortgagors. The mortgagor is entitled to take advantage of an opportunity to repay the principal on giving three months’ notice to the lender or paying three months’ interest in lieu of notice. Section 17 of the Mortgages Act does not allow a mortgagee to levy an interest penalty when enforcing payment of principal on a matured mortgage. In fact, subsection 17 (3) makes clear that the section has no affect on lenders’ rights at all.

In NRD Management Services Ltd. v. Dorothy Litwin, 2021 ONSC 3238 (CanLII), In this caseNRD is seeking to levy three months’ interest on the principal after the mortgage matured in July of 2019, and after it commenced enforcement proceedings. The court agree with the reasoning of Justice Boswell.  Specifically, if NRD were entitled to collect the three month “termination bonus” (as NRD has called it), it would amount to a penalty over and above the amount of interest that it contractually agreed to receive upon repayment.  Moreover, the decisions in Ialongo, supra, and 2468390 Ontario Inc. v 5F Investment Group Inc., 2017 ONSC 4641 suggest that once a mortgagee takes enforcement proceedings, it has removed the option from the mortgagor of redeeming the mortgage.   If three months’ interest was due after enforcement proceedings had begun, the rights of a mortgagor would become obligations of a mortgagor and concluded that termination bonus” of $8,242.50 is not owed by Ms. Litwin to NRD.

In 2642322 Ontario Inc. v. Rexell Developments Inc.,2023 ONSC 1979, it has been held that “Section 17 of the Mortgages Act does not permit the mortgagee to add an additional three-month penalty. This section allows a defaulting mortgagor to repay the entire principal with three months’ notice to the lender or pay three months’ interest in lieu of notice, despite any term of the mortgage providing otherwise. 28 Section 17 does not allow a mortgagee to levy a penalty on a mortgagor who has defaulted. It is not a basis for a claim by a mortgagee unless first the mortgagor seeks a payout and charging a three-month interest penalty for default on a mortgage is contrary to s. 8 of the Interest Act.”

Automatic Renewal Clause

The automatic renewal clause, if increases the rate of interest to be charged and other charges would be in breach of section 8 of the Interest Act. However, if the borrower after the maturity date enters into another mortgage agreement in the shape of renewal mortgage agreement, in that case the parties are free to enter into new terms and conditions as regards the rate of interest and other charges subject to the ambit of Interest Act, Mortgages Act, Criminal Code and other statutes.

In Bhanwadia et al. v. Clarity Financial Corp., 2012 ONSC 6393 (CanLII), it has been held that “In the present case, the mortgage provided for an interest rate of 13.99% per annum on the amounts advanced.  The clause supporting the 18% interest rate charged provided: The Mortgagors agree that on the maturity date of this mortgage, or upon any default or breach of the terms of this Charge/Mortgage, in the events of breach or default enumerated in this schedule or in the Mortgage/Charge or Charge terms, or if the Chargers/Mortgagors fail to renew or payout the mortgage by the maturity date, or enter into a renewal agreement with the Mortgagee, then the mortgage shall bear interest at the rate of interest of 18% per annum from date of either such default or breach as set out herein or from such maturity date, whichever event first occurs, until such time as the mortgage is paid in full or renewed. The wording of the increased interest clause of the Clarity mortgage provided for an increase in interest as a penalty and is therefore in breach of s. 8 of the Interest Act”. 

In Walia v. 2155982 Ontario Inc., 2019 ONSC 1059 (CanLII), the court declared the renewal agreement to be not enforceable, declared the term increasing the rate of interest as invalid but allowed the administrative fee of $4,500.00 added pursuant to default in making the mortgage on due date.

The Court reasoned that an exorbitant renewal fee, combined with an automatic renewal clause that allows a lender to charge a much higher interest rate for the renewal period, is “a type of penalty and one controlled entirely by the plaintiffs.” Under those circumstances, the mortgage renewal fee was disallowed.Romano v Sills, 2017 ONSC 6367.

Non-Sufficient Fund (NSF)Charges

The debtor is liable to pay actual expenses incurred by the lender, in case of return of cheque for insufficient funds in the account of debtor or for any other reason owing to fault on the part of the debtor. However, the lender is precluded from charging over and above the actual expenses, even if written in the mortgage agreement or agreed upon by the debtor/mortgagor.

The general principle is that a mortgagee is entitled to be indemnified for the costs that are incurred to respond to a default by a mortgagee. But it is also accepted that the costs claimed must be reasonably and properly incurred. A mortgagee must be able to ascertain, assert and finally defend its right to the legal fees in connection with the mortgage debt.  Section 8(1) of the Interest Act, R.S.C. 1985, c. I-15, as amended, prohibits fines, penalties or rates of interest on account of any arrears of principal or interest secured by a mortgage. Chong &Dadd v. Kaur, 2013 ONSC 6252 (CanLII).

In NRD Management Services Ltd. v. Dorothy Litwin, 2021 ONSC 3238 (CanLII), the court held that NSF Fees (5 x $250 = $1250) has been claimed by the lender, however “This amount is also chargeable pursuant to the mortgage contract (s. 3).  Mr. Chimienti’s affidavit asserts that these are not merely late charges for missed payments but intended to cover the administrative cost of the bank fees for reversed payments and staff time “to follow-up with the borrower and the underlying investor”.  I accept that there are bank fees for each reversed payment that was incurred.  However, when a mortgagor is in default repeatedly, as Ms. Litwin was, I fail to appreciate what the subsequent “follow-up with the borrower and underlying investor” would entail for each subsequent NSF payment other than be a brief email or call advising of the NSF payment and demanding payment. Mr. Chimienti did not provide particulars to justify what proportion represented bank fees versus administrative fees, although I accept that some administrative time would be needed with each NSF payment.  As such, I reduce this total amount by half to $625”.

Late Payment Fee

The late payment fees can be charged which reflects the actual costs incurred for recovery of the debt.

In Roopchand v. Ghuman, 2021 ONSC 3163 (CanLII), In the absence of evidence that the charges in question reflect real costs legitimately incurred by the respondents for the recovery of the debt, in the form of actual administrative costs or otherwise, the only reason for the charges was to impose an additional penalty or fine, apart from the interest otherwise payable under the Mortgage, thereby increasing the burden on the appellants beyond the rate of interest agreed upon in the Mortgage.  The courts have not hesitated to disallow similar charges on the basis that they offend s. 8 of the Interest Act:

Statement Fee, Statement Preparation Fee, and other charges towards discharge of mortgage

The statement fee, Statement Preparation Fee and charges for discharge of mortgage do fall within the ambit of interest as mentioned in section 8 of the Interest Act and as such can be charged subject to the condition that they are reasonable charges and are not exorbitant.These amounts are chargeable pursuant to the mortgage contract The lender can claim on actual preparation of discharge of mortgage and not merely on default.

In NRD Management Services Ltd. v. Dorothy Litwin, 2021 ONSC 3238 (CanLII), the court allowed discharge fee of $750.00 by holding that “This amount is chargeable pursuant to the mortgage contract (s. 8).  Mr. Chimienti’s affidavit states it is to cover administrative efforts in preparing final accounting, liaising with the investor to have discharge documents signed off, and remitting funds.  In my view, it is reasonable, properly incurred, and payable”.

Further the court allowed Statement Prep Fee of $1,250.00 by holding that “This amount is also chargeable pursuant to the Mortgage contract (s. 7).  Mr. Chimienti’s affidavit states that over the course of the various refinance attempts, Hosper on behalf of NRD has produced six different discharge statements or information statements at the Defendant’s request.  It was a cost incurred, although the evidence shows that at least one statement, dated February 4, 2021, had administrative errors that significantly inflated the amount.  It would be inappropriate and unfair to pass this cost on to Ms. Litwin. Therefore, the total amount payable for statement prep fees is $1250 and not $1500”. 

Further the court allowed Default Proceedings Fee, of $2,250 although claimed as (4 x $750 = $3000). The court allowed the following payments:

Pre-Judgement and Post Judgement Interest

Absent exceptional circumstances, the interest rate which had governed the loan prior to breach would be the appropriate rate to govern the post-breach loan. The application of a lower interest rate would be unjust to the lender.This analysis applies equally to pre-judgment interest and post-judgment interest.

In Pizzey v. Crestwood Lake Ltd., 2004 CanLII 36108 (ON CA) ,it has been held that Interest on the note after maturity was payable by law under s.133(b) of the Bills of Exchange Act, R.S.C.1985, however, because s. 133(b) did not stipulate a rate of interest, s.3 of the Interest Act applied and established a rate of 5 per cent per annum.

In NBY Enterprises Inc. v. Duffin, 2006 CanLII 7519 (ON SC),, it has been held that the statutory prejudgment interest rate under s.128(1) of the Courts of Justice Act is 4.8 per cent. However, s. 130 gives the court discretion to vary the prejudgment interest rate where the “circumstances of the case” so require. 

From the reading of various provisions of law and the case law, it can be capsulized as:

1. Interest:
   1. Any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on, except as otherwise provided by Interest Act or any other Act of Parliament.
   2. In Canada, there is cap for charging annual rate of interest, which cannot exceed 60% on the credit advanced under an agreement or arrangement.
   3. Whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum.
   4. 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.
   5. The pre-judgement and post judgement interest is at the same rate, which is payable on principal not in arrears.
2. Severance of provisions ofContract: where an interest rate provided for in an agreement exceeds the 60 percent statutory maximum, the interest rate provision of the contract may be severed without declaring the whole contract void and the interest can be awarded as 60 percent per annum. Any condition, which violates the provisions of Interest Act, Mortgages Act, Criminal Code or against any statute can be severed and the relief can be moulded to be in consonance with the statutory provisions without declaring the entire contract to be void.
3. Automatic Renewal: The automatic renewal clause, if increases the rate of interest to be charged and other charges would be in breach of section 8 of the Interest Act. However, if the borrower after the maturity date enters into another mortgage agreement in the shape of renewal mortgage agreement, in that case the parties are free to enter new terms and conditions as regards the rate of interest and other charges subject to the ambit of Interest Act, Mortgages Act, Criminal Code and other statutes.
4. Administrative Fee: The administrative costs and legal feescannot be said to be fine, penalty or rate of interest stipulated for taken, reserved or exacted on the arrears of principal or interest secured by mortgage, however these should be real costs incurred by the lender. The said costs and legal fees should be reasonable and if contested can be assessed by the assessment officer under the mortgagees Act.
5. Legal Fees: The legal feescannot be said to be fine, penalty or rate of interest stipulated for taken, reserved or exacted on the arrears of principal or interest secured by mortgage, however these should be real costs incurred by the lender. The said legal fees should be reasonable and if contested can be assessed by the assessment officer under the mortgagees Act.
6. NSF Charges: The debtor is liable to pay actual expenses incurred by the lender, in case of return of cheque for insufficient funds in the account of debtor or for any other reason owing to fault on the part of the debtor. However, the lender is precluded from charging over and above the actual expenses, even if written in the mortgage agreement or agreed upon by the debtor/mortgagor.
7. Three months’ interest penalty: charging of three months interest by the lender on default by the borrower in making the payment of amount due under the mortgage either prior to maturity date or after the maturity date violates the mandate of section 8 of the Interest Act and is unenforceable. However, if the mortgagor intends to pay back the mortgage amount either before or after the maturity date, the borrower/mortgagor has to give three months notice to the mortgagee and in case wants to pay off the mortgage amount prior to three months notice, then in that eventuality, the mortgagor/borrower has to pay three months interest and the lender can validly ask for three months interest. if the mortgagee takes steps to realize on the mortgage, the mortgagee is only entitled to interest actually owing on the principal and not an additional three months as set out in  17 of the Mortgages Act, however, if the mortgagor wants to pay back the mortgage amount either prior to maturity date or afterwards, in that case, the mortgagor has to give three months notice to the mortgagee or to pay three months interest in Liew thereof.
8. Charges to prepare file for enforcement: If the file is prepared and with proof of actual charges incurredcan be claimed by the lender.
9. Statement Fee, Statement Preparation Fee and other charges towards discharge of mortgage:The statement fee, Statement Preparation Fee and charges for discharge of mortgage do fall within the ambit of interest as mentioned in section 8 of the Interest Act and as such can be charged subject to the condition that they are reasonable charges and are not exorbitant. These amounts are chargeable pursuant to the mortgage contract The lender can claim on actual preparation of discharge of mortgage and not merely on default.
10. Discharge Fee: The lender can claim on actual preparation of discharge of mortgage and not merely on default.
11. Missed payment fee:The lender can claim, Ifclearly written in mortgage commitment that fee payable on each default occurrence otherwise only single paymentand actual expenses incurred by the lender.
12. Late payment fee: The late payment fees can be charged which reflects the actual costs incurred for recovery of the debt.
13. Lender’s fee: Can be charged, if agreed as per mortgage commitment, however, cannot be charged as default fee and cannot be to impose an additional penalty or fine, however, if it is part of interest to be paid at the time of mortgage, cannot be said to be additional penalty or fine and is not a default fee.
14. Renewal Fee: An exorbitant renewal fee, combined with an automatic renewal clause that allows a lender to charge a much higher interest rate for the renewal period, is a type of penalty and one controlled entirely by the lenders and as such is unenforceable.
15. Mortgage default:Fees and charges levied on a mortgage default that are genuine pre-estimates of costs actually incurred by a lender are enforceable.

Disclaimer – This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please seek for professional advice to discuss these matters in the context of your circumstances. The author, its partners, employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

Rajinder Goyal

Advocate

Former Additional Advocate General, Punjab          

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