Locked-in Mortgage - No right to prepay #84

By Gerry Neely
B.A. LL.B.

There must still be some high interest mortgages in force because I have received several calls from licensees asking for an update of columns 38 and 39 in which the question of whether or not a locked-in mortgage could be prepaid before maturity was discussed. As you will recall, the opportunity for a mortgagor to prepay before maturity depended upon whether the term of the mortgage brought the facts within Section 10 of the Interest Act.

That section states that if a mortgage is payable more than five years after the date of the mortgage, then the mortgagor may, after the expiration of the five year period, tender the amount of principal and interest, together with three months interest in lieu of notice, to the mortgagee. If the mortgagee refuses to accept such tender, no further interest is payable under the mortgage.

The mortgagors who applied to the Court for a declaration that they were entitled to prepay their mortgages, had mortgages that fell into two different fact patterns. The first fact pattern was that of a mortgage whose original term was more than five years from the date of execution of the mortgage. The second fact pattern was of a mortgage whose original term was less than five years, but the mortgage had been renewed by one or more extensions so that the renewals extended the original term beyond five years.

Those mortgagors fortunate enough to fall into the first fact pattern found that the Courts ruled in their favour. Those mortgagors whose mortgages fell into the second fact pattern were not as fortunate - some were successful, and some were not.

A recent BC Court of Appeal decision considered a mortgage granted in 1978 for a two year term. It was renewed for a further one year period and then for a further four year period expiring November 1985. In February 1984, the Mortgagors asked for a discharge on the grounds that considering the number of extensions, more than five years had passed since the date of their mortgage.

This argument was successful in the Supreme Court. However the Court of Appeal took a different view of the facts. Its discussion of the cases where the original term of the mortgage exceeded five years indicated that had those facts been before it, the Court of Appeal would have granted the right of prepayment. However it declined to grant this right in a case where the original term of the mortgage was less than five years, even though the renewals resulted in a total term longer than five years. The Mortgagor was locked in for the balance of the renewal term.

As was pointed out in the Reasons for Judgment, and using another example, if the original term was three years, and that term was renewed and extended for a 20 year term without a prepayment privilege, then the Mortgagor was locked in for the whole of the 20 year renewal.

The Court's opinion was that the only way this could be altered would be by a change in legislation. The change would be one that gives the mortgagor the same right after the end of five years of the renewal term, as a mortgagor now has with respect to the original term of the mortgage.

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