Interest Calculation #95
By Gerry Neely
Have you ever had a vague suspicion that the interest quoted to you on the pay-out of a loan was higher than it should be? However, your suspicions were lulled by the delivery by the mortgagee of an amortization schedule showing in detail the amount of interest charged to you over the term of the loan. The results of a case dealing with the following facts may lead to more questioning of pay-out statements provided by mortgagees or unpaid vendors.
Two purchasers owed $275,000.00 payable with interest at 11% over five years and decided to have their accountants check the pay-out statement provided by the vendor when they came to the conclusion that the interest demanded by the vendor was more than the vendor was entitled to receive.
The dispute came before a judge who was asked to decide what the following words in an Agreement for Sale meant:
". . . for the price of $365,000.00. . . payable. . . $90,000.00 on the execution of this Agreement. . . and the balance. . .
together with interest at the rate of 11% per annum calculated annually, not in advance. . . in consecutive monthly
installments. . . Each of the said monthly installments shall be applied firstly to interest and secondly to principal."
A further clause provided that:
". . . all arrears of interest shall bear interest at the rate aforesaid from due date to payment thereof."
The accounting experts who testified on behalf of both parties all agreed that the frequency of compounding was an essential part of any interest calculation.
The purchasers' accountants decided that the words "calculated annually, not in advance," meant that interest was to be compounded once each year, at the end of each year. They prepared a computer printout using a monthly rate of 10.48% as the equivalent of 11% compounded annually, not in advance.
According to this calculation, the first eleven monthly payments were applied entirely to principal. Interest at 11% was calculated on the declining balance each month and totalled. The subsequent monthly payments were then applied against that interest until it was fully paid. In month 22, the reduction of principal resumed and the process was repeated annually.
"No way, Jose," said the vendor. He said that the significant portion of the clause that decided the frequency at which interest was to be calculated was the portion that said the "monthly installments shall be applied firstly to interest and secondly to principal." That made interest payable monthly under the agreement for sale and the words "calculated annually" were meaningless. Under his method, the vendor would calculate accrued interest at the end of each month by taking 1/12th of the annual rate, applying that to the principal balance outstanding at the end of the month, and then using the monthly installment to pay the amount of interest so calculated. Any balance of the monthly payment would be applied to reduce the principal before the next monthly calculation.
The Judge didn't buy the argument that the phrase "calculated annually" was meaningless, because the Interest Act (Canada) contains similar language. He concluded that the word "calculate" was synonymous with the word "compounded" and held that "compounding" in this agreement occurred only once a year.
The happy result for the purchasers was a reduction of approximately $8,500.00 in the amount of interest they had to pay.
|1.||Lynch and Utter v. Elford Estates Ltd.,6 B.C.L.R. (2d) at p. 69.|
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