The client
A homeowner in Brockville carried a $145,000 private mortgage at a 9% performing rate, current except for a brief 62-day span where two payments ran late.
Private mortgage balance
$145,000, 9% performing rate
Default clause
15% on the full balance while in arrears
Arrears period
62 days, since cured
Household income
$7,200/month
The problem
The mortgage agreement's default clause was ordinary-looking boilerplate: if a payment fell behind, the rate on the entire outstanding balance jumped from 9% to 15% until the borrower caught up. The lender's payout statement, prepared once the borrower found a refinance to exit the file, priced the 62 days of arrears at that higher rate and folded the difference into the balance owing.
Why the default-rate premium could not stand
- ▸Section 8 of the federal Interest Act prohibits any fine, penalty, or rate of interest on arrears secured by a mortgage on real property that has the effect of increasing the charge on the arrears beyond the rate payable on principal not in arrears
- ▸The clause did exactly that: 15% on the whole balance, for as long as any part of it was behind, against a 9% rate on the same balance when current
- ▸The provision applies regardless of how the clause is worded -- courts look at the clause's actual effect, not whether it is labelled a penalty
Two missed payments, cured within nine weeks, should never have grown the balance owing by more than the missed payments themselves. The default clause had quietly tried to make it do exactly that.
The numbers
The correction was small in dollars and large in principle -- the kind of figure a payout statement can bury without anyone checking the clause behind it.
| Correcting the payout statement | Amount |
|---|---|
| Mortgage balance | $145,000 |
| Stated payout, with default-rate premium | $146,478 |
| Corrected payout, at the performing rate throughout | $145,000 |
| Refinance qualification | Figure |
|---|---|
| Payment at the qualifying rate (8.25%), 25 years | $1,130/mo |
| Property tax | $310/mo |
| Heat | $140/mo |
| Car loan | $260/mo |
| Total debt service | 25.6% |
$1,478 is the arithmetic difference between 62 days at 15% and 62 days at 9% on the outstanding balance -- the exact amount section 8 says the lender was never entitled to charge. National arrears-rate data shows how common a brief, cured default like this one actually is; what is uncommon is a lender's own statement quietly pricing it at a rate the law does not allow.
The solution
A mortgage agent licensed under Ontario's Mortgage Brokerages, Lenders and Administrators Act read the default clause against the payout statement line by line before authorizing the closing figure.
First, identified the 62-day arrears period and the rate the lender had actually applied to it -- 15%, against a 9% performing rate on the same balance.
Second, calculated what section 8 of the Interest Act permits: interest on the arrears at no more than the rate payable on principal not in arrears -- 9%, not 15%.
Third, presented the corrected figure to the private lender's own counsel before closing, rather than paying the stated amount and raising the point afterward.
The outcome
The refinance funded at 6.25%, paying out the corrected $145,000 balance rather than the lender's stated $146,478, at 25.6% total debt service.
Because this is an uninsured refinance, CMHC's ratio maximums do not apply directly; the 25.6% figure is informational.
What to take from this file
- 01Section 8 of the federal Interest Act bars a higher rate on mortgage arrears than on principal not in arrears -- on a mortgage over real property, in any province, regardless of how the clause is worded.
- 02Courts look at a clause's actual effect, not its label. Calling it a 'default rate' rather than a 'penalty' does not exempt it from section 8.
- 03Read every payout statement against the mortgage document itself. A small, quietly-priced premium is easy to miss if the statement is taken at face value.
- 04A brief, cured default should never grow the balance owing by more than the missed payments themselves. If it does, check the default clause before paying the difference.
Sources
Every regulatory figure in this file traces to one of these primary sources. Client details and anything that varies by lender are illustrative, as flagged below.
- ▸OSFI — Minimum qualifying rate for uninsured mortgages — the minimum qualifying rate — greater of contract rate + 2% or 5.25%.
- ▸Provincial/territorial mortgage-broker legislation fetched directly (bclaws.gov.bc.ca, legisquebec.gouv.qc.ca, fcaa.gov.sk.ca, web2.gov.mb.ca, nslegislature.ca, assembly.nl.ca) plus FCNB's own site for NB and CanLII's index for PE — see notes for per-province method — provincial mortgage regulators and licence titles.
Illustrative in this file — lender-specific, not rules:
- ▸9% / 15% / 6.25% rates — rates move daily; none is a quote.
- ▸62-day arrears period — this file's own dated payment history; every default's cure period is individual.
Authority & provenance
How this case file was built
We publish the origin, the verification method and the reviewer for every case file, so you can judge how far to trust it before you rely on it with a client.
Where it comes from
Derived from files handled by Treadstone’s fulfillment desk and from scenarios contributed by partner brokerages. Names, employers, exact amounts and dates are changed so no client or file is identifiable.
Provenance: Composite — a pattern seen repeatedly on fulfilled files, not a single transaction.
What is verified
Every regulatory figure traces to a primary source listed above and was checked against it on the date shown. The arithmetic is recomputed by machine on every rebuild.
Anything that varies by lender is labelled illustrative rather than stated as a rule.
Who reviewed it
Reviewed for Canadian regulatory accuracy before publication, and re-checked whenever a cited rule changes.
Reviewed by: Nicholas Parson, Treadstone Associates — reviews every case file before publication.
This case file is professional reference material for licensed mortgage professionals. It is not advice to a borrower, and it is not a lender commitment. Insurer rules, qualifying rates and provincial taxes change — confirm the current position with the insurer, regulator or lender before you rely on any figure here in a live file.