Mortgage Default Interest and Penalty Fees in Ontario

Missing a mortgage payment rarely costs you only the payment. Letters often follow that add interest, a late charge, legal fees or an administration fee, and the balance can grow faster than you expected. It is fair to ask which of those charges the lender is actually entitled to.

This article explains the main rules that limit what a lender can add when you are in arrears on an Ontario mortgage, which charges courts have looked at, and how to ask for a clear breakdown. It is general information, not advice on your own mortgage. The outcome in any case depends on your mortgage documents and what the lender can prove.

What the Interest Act says about interest on arrears

People often use the phrase default interest to mean a higher rate that applies once you miss payments. In Ontario, the main limit on that idea is the federal Interest Act, which applies to mortgages on real property.

Section 8(1) says that no fine, penalty or rate of interest may be stipulated for or taken on arrears of principal or interest secured by a mortgage on real property if it increases the charge on the arrears beyond the rate payable on principal not in arrears. Section 8(2) adds that a mortgage may validly provide for interest on arrears at a rate not greater than the rate payable on principal not in arrears.

In plain words, a lender can charge the ordinary contract rate on your missed payments, but not a higher penalty rate on them. That rule is about the rate on arrears. It is not a rule that a lender can never charge any fee, which is why the next section matters.

Fees, penalties and what the courts have allowed

The Ontario Court of Appeal has looked at several kinds of added charges. In one decision it upheld the disallowance of unexplained professional and administrative fees that a lender added to the discharge amount, but it allowed late-payment charges that were substantiated and did not offend the Mortgages Act or the Interest Act. The court said a lender must be able to justify its legal fees and that the standard charge terms are not a carte blanche to incur and charge fees.

In another decision the Court of Appeal held that a three-month interest compensation charge did not violate section 8 of the Interest Act, and it rejected an argument that receivership-related fees were a penalty. Taken together, these decisions show that outcomes turn on the facts and on what the lender can substantiate.

Acceleration is another source of confusion. The standard charge acceleration clause lets a lender demand the principal on default, but the Court of Appeal held that it does not entitle the lender to future, unearned interest; the lender was entitled only to interest accrued to the date of default.

Asking for a written statement and disputing charges

You do not have to guess what the lender says you owe. Under section 22(2) of the Mortgages Act, a mortgagor can give written notice requiring the mortgagee to provide a written statement of the principal or interest in default, the nature of the default, and the amount of expenses necessarily incurred. The lender must respond within 15 days after receiving the request, and if it fails without reasonable excuse, or the statement is incomplete or incorrect, its enforcement rights are suspended until it complies.

That suspension has limits. A lender's non-compliance does not invalidate a purchaser's title in a power of sale, and the suspension stops the right to enforce without removing the lender's substantive rights. Your remedy for an improper sale is against the lender. So treat the statement as a tool for clarity and leverage, not as a way to make the debt go away.

If you still disagree with a charge, the courts are open to you. The Court of Appeal rejected the argument that an assessment under section 43 of the Mortgages Act was the only route for disputed charges, and held that the court hearing the application could decide all issues, including whether added fees were legitimate.

Private lenders and the criminal interest rate

If your mortgage came from a private lender, the Criminal Code adds another limit. Entering into an agreement to receive interest at a criminal rate, or receiving it, is an offence punishable on indictment by up to five years in prison or on summary conviction by a fine of up to $25,000. A criminal rate is an annual percentage rate, calculated under generally accepted actuarial practices, that exceeds 35 per cent on the credit advanced.

Interest for this purpose means all charges and expenses paid or payable for advancing credit, including fees, fines, penalties and commissions, so it is not limited to the stated rate. Fees taken off the advance reduce the credit advanced and raise the effective rate. Some commercial loans to non-individuals borrowing for business purposes are exempt, but loans to individuals for personal purposes stay under the 35 per cent cap. Whether a particular loan crosses the line needs a proper calculation, ideally by a lawyer.

Mortgage brokers and agents in Ontario must give written disclosure, and private lenders must receive the prescribed disclosure signed by a licensed broker, with fees paid to the brokerage and disclosed in writing. Ask to see those documents if you are unsure what you agreed to.

What to do next if you are in arrears

Default can eventually lead to a forced sale, so it helps to act early. Under a mortgage's own power of sale clause, the borrower must be in default at least 15 days before notice, and the lender must give at least 35 days' notice of intention to sell to everyone with an interest in the property. If the mortgage has no power of sale clause, the statutory power of sale applies after three months' default in payment and 45 days' notice. Notices of sale use the prescribed Form 1, Notice of Sale under Mortgage.

• Keep every letter, statement and email from the lender, and note the dates you received them.
• Read the charge terms and mortgage commitment for the rate, late-payment charges and fee wording.
• Send the lender a written request for a statement of the amount in default and the expenses claimed, and diarize the 15-day response period.
• Ask the lender to explain each fee and what it was for, and ask for invoices for legal fees.
• Compare the rate charged on arrears with the ordinary contract rate.
• If a notice of sale arrives, do not ignore it; speak to a Ontario real estate lawyer promptly about your timelines and options.

Frequently asked questions