Private Mortgages in Alberta: Legal Limits on Interest, Fees and Penalties

A private or second mortgage can solve a short-term problem, but the terms are often tougher than a bank's. Before you sign, it helps to know which laws set the outer limits on what a private lender can charge you.

This article walks through the main federal and Alberta rules on interest, fees, penalties, prepayment and discharge. Your actual mortgage contract still matters a great deal, so have a lawyer read it before you commit.

This article covers the law of Alberta.

What a mortgage is, and how interest must be stated

Under the Alberta Land Titles Act, a mortgage is a charge on land created merely to secure a debt or loan. A registered mortgage has effect as security only. It does not operate as a transfer of the land, so you remain the registered owner.

A second mortgage is registered the same way as a first and carries its own levy. It ranks behind the first because the first has the earlier serial number. Registration order, not signing date, decides who is first and who is second.

For mortgages repaid by blended or sinking-fund style payments, no interest is chargeable or recoverable unless the mortgage states the principal and the yearly or half-yearly rate. If another clause states a higher rate, the lender is limited to the lower stated rate.

The Interest Act also says no fine, penalty or higher rate of interest may be stipulated or taken on arrears of principal if it raises the charge above the rate payable on principal that is not in arrears. A clause that jumps your rate just because you are late may therefore be a problem for the lender.

The 35 per cent criminal rate

Under Criminal Code s. 347, a criminal rate is an annual percentage rate, calculated by generally accepted actuarial practices, that exceeds 35 per cent on the credit advanced. Charging or receiving it is an offence punishable by up to five years' imprisonment on indictment.

"Interest" here includes all charges and expenses for advancing credit. For mortgages it excludes property taxes. In practice, lender fees and broker fees count toward the cap, so a modest-looking rate can still cross the line once fees are added. Whether any exemption applies to a commercial loan depends on the facts, so ask a lawyer.

Prepaying a private mortgage

If principal or interest on a mortgage on real property is not payable until more than five years after the date of the mortgage, you may pay what is due plus three months' further interest in lieu of notice. After that, no further interest is chargeable. This right does not extend to certain mortgages and debentures given by corporations and prescribed entities.

The federal Code of Conduct on prepayment information does not cover provincially regulated or private lenders. With a private lender, your contract decides what prepayment charge applies, so read that clause closely. Open mortgages allow prepayment without penalty, and prepayment privileges let you pay extra up to a limit.

• Ask for the prepayment terms in writing before you sign.
• Ask whether the mortgage is open or closed.
• Ask how any charge is calculated, as it is usually the higher of three months' interest or the interest rate differential for typical lenders.

Land-only protection if the lender enforces

In a mortgage enforcement action, the lender's right is restricted to the mortgaged land, and you cannot waive that protection. On a foreclosure order, the default redemption period is six months for land other than farm land and one year for farm land. This generally means private and second-mortgage lenders cannot sue you personally on the covenant.

There are exceptions. These protections do not apply to mortgages given by corporations. They also do not apply to a high-ratio mortgage as defined in the regulations, so the protection does not help on an insured high-ratio first mortgage. Whether your mortgage falls into that category is worth confirming with a lawyer.

Paying off and getting your discharge

Once a mortgage is fully paid, the mortgagee must give you a discharge within 30 days. The lender cannot charge a fee or expense for the discharge, and a lender who fails to provide it or charges for it commits an offence with a fine of up to $500. Because the statute may have been amended, have a lawyer confirm the current wording of s. 75.

A discharge is normally in the prescribed form, signed by the mortgagee with the proper affidavit of execution. Once it is entered on title, the land stops being liable for the amount discharged. If the lender cannot or will not sign, a judge's certificate can allow the Registrar to discharge the mortgage.

• Pay out the mortgage and any related line of credit.
• Ask the lender to confirm in writing that it is paid in full.
• Make sure the discharge is registered on title.
• Keep a copy of the registered discharge.

What to do next

Before signing, ask for the full mortgage terms, add up every fee, and have a lawyer review the stated rate, penalty clauses and prepayment terms. If you think a term breaks these rules, get advice before you pay or sign anything further.

Frequently asked questions