March 15th 2024
Anyone who has ever had a mortgage will know that there are lots of legal terms that apply. This is true especially when it comes to legal terms that relate to what happens if you fail to make payments. For families that have defaulted in the payment of their mortgage and have received notice of a sale from their lender, the legal experience can feel overwhelming. In today's economy, the challenge of keeping up with high mortgage payments can sometimes be compounded by traumatic events that a family has experienced, including the death of a loved one, unexpected loss of employment, and the physical or mental health limitations or injuries that impact one’s ability to manage mortgage payments.
For these families and the lawyers who help them navigate the sale or refinance of their home, the process can feel rushed. Unfortunately, lenders have often been inclined to seek extra payments from borrowers once a default occurs. This two-part article will show first what lenders are attempting to do, and in our second part, show why this is illegal using case law.
When a lending institution or a private lender seeks to enforce a mortgage or loan with the home as the security for such payment, the lender often initiates legal proceedings together with the delivery of a notice of sale for the property. In the process of delivering this notice of sale, the lending institution will provide an accounting of how much is owed by the borrower. This payout statement is a formal document that a borrower relies on in order to have their mortgage discharged from the land.
With increasing frequency, lenders will add to their payout statement that the borrowers owe an additional three (3) months penalty of interest, simply for being in default on previous payments. With interest rates being higher now than in previous years, asking a borrower to make an additional payment of three (3) months interest is substantial. Lenders attempt to position the demand for an extra three months of interest payments as being "a part of the mortgage terms". However, s.8 of the Interest Act prohibits a lender from creating a situation where the effective interest rate on arrears owing becomes higher than monies lawfully owed when the borrower was not in arrears. The “triggering event” of default means the lender has added a lump sum amount owing to the principal which creates a rate of interest on the principal that was higher than before. It is plain and obvious to see that this penalty is illegal and a violation of section 8 of the Interest Act, yet lenders continue their unlawful practices by demanding such payment from borrowers. Lenders who collect this sum of money are doing so in breach of the rights afforded to borrowers under the Mortgages Act and the Interest Act, and the law firms who give this payout statement are arguably complicit in such illegal behaviour. This unlawful extraction of money only hurts desperate families – something s.8 of the Interest Act was intended to protect families against.
In the next part of this newsletter, we explore the case law involving the 3 month mortgage penalty. By the end of this 2 part newsletter, you should understand from a legal perspective why the 3 months penalty is always unlawful!
If you are selling or refinancing your home, do not hesitate to contact Liddiard Law today!
Best regards,
Michael C. Liddiard, BA MA JD
michael@liddiardlaw.ca
Liddiard Law Professional Corporation