Prepayment of a Locked in Mortgage #38

By Gerry Neely
B.A. LL.B.

The contrast between today's relatively low rates of interest and the high rates found in mortgages which were renewed in 1982 has led the mortgagor with a closed renewal mortgage to try to find ways in which the mortgage can be paid off before maturity. These ways have included protests to both Provincial and Federal Ministers of Consumer Affairs. They also have included a re-examination of a 1980 Ontario decision interpreting a section of an Ontario statute, The Mortgages Act. The section in question is substantially identical in its substance to Section 10 of the federal Interest Act. The essence of that section is that where a mortgage is payable more than five years after the date of the mortgage, then at any time after the expiration of such five year period the mortgagor is entitled to pay to the mortgagee the amount due for principal and interest, together with three months' interest in lieu of notice. If the mortgagee refuses to accept such payment, no further interest is payable under the mortgage.

The general assumption which prevailed before the decision in the Ontario case was that the section of the Federal Interest Act quoted referred to a closed mortgage with a term of more than five years, i.e. six years, seven years, etc. However, the Ontario Court concluded that the term of the mortgage was to be measured from the date of its execution so that in the following circumstances, the plaintiff mortgagor was held to be entitled to pay off his mortgage before the renewal term expired. The mortgage had been signed on July 18, 1973. The interest adjustment date was August 1, 1973, and the mortgage matured on August 1, 1978. During July, 1978, the mortgagor accepted a renewal of the mortgage that allowed him to prepay only up to five per cent of the principal on each anniversary date. In November, 1978, the mortgagor sought to prepay the mortgage and was told that could be done only upon payment of nine months' interest penalty. The mortgagor paid this amount under protest and then sued successfully to recover the interest penalty to the extent that it exceeded three months' interest. The mortgagor's success depended upon the date of the execution of the mortgage, a date which prior to the decision in this case, was thought to be of relatively little significance.

The defendant mortgagee must have questioned the applicability of the Interest Act since the mortgage had been renewed. The Court dismissed this argument on the basis that there was only one mortgage in existence and that was the original mortgage.

This case will have limited application since very few five year mortgages have been granted in the past few years. It will apply mainly in circumstances where an original five year term mortgage has been renewed. In addition, the decision was based upon an Ontario statute for which there is no comparable statute in British Columbia. Any action in British Columbia would be brought under the provisions of the Federal Interest Act, and the Ontario decision, while persuasive, would not be binding upon a B.C. Court. The Court could decide that Section 10 of the Federal Interest Act applied only to mortgages where the initial closed term exceeded five years. However, this case is a good case for anyone whose mortgage falls within its facts since it provides a legal argument for the right to prepay a mortgage before the expiration of the renewal period.

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