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Increased Rates of Interest on a Mortgage Default

Section 8 of the Interest Act (Canada) states that a mortgage cannot provide for a higher rate of interest after default than it does prior to default. There have been numerous court decisions throughout the years considering various mortgage provisions that attempt to comply with that requirement in creative ways.

The latest such decision comes from the British Columbia Supreme Court in Reliant Capital Ltd. v. Silverdale Development Corp. (2005) R.P.R. (4th) 303. In this case a creative structure used to try and capture a higher rate of interest on non-payment of the loan when it became due did not succeed.

The mortgage loan from Reliant Capital provided for an interest rate of 14% per annum for the first 12 months and 20% thereafter. The term of the mortgage was 13 months and 22 days. The structure therefore provided for the interest rate to increase after a certain period of time within the mortgage term, and not after default or maturity (which would have been a clear violation of Section 8 in this circumstance).

Notwithstanding this structure, the court found that the true purpose or substance was to create a penalty in the form of a higher rate of interest following non-payment of the loan at maturity. The court followed a number of other cases that looked at the substance of the mortgage provision, rather than its form. Creating an “artificial” later maturity date and increasing the rate before that date was seen as a device simply to avoid the application of Section 8 of the Interest Act (Canada) with no legitimate commercial purposes to save it. The structure did not succeed.

Bill Rowlands

June 27, 2005 in Financing | Permalink

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Comments

Nice to see that the little guys win sometimes!

Thanks for the post,
Mark

Posted by: Mark Argentino | Feb 22, 2008 11:57:10 PM

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