The client
A homeowner in Sorel-Tracy consolidated a $198,000 first mortgage at 4.25% and a $72,000 private second, the second carrying its own variable rate (9.50% currently), into one new A-lender refinance.
First mortgage balance
$198,000
4.25%
Private second balance
$72,000
Variable rate, 9.50% currently
Private lender's invented comparison rate
6.50%
No such rate exists anywhere in the loan's own terms
Loan's own written penalty clause
Three months' interest
No differential mechanism mentioned at all
The problem
An interest-rate-differential penalty compares a fixed contract rate against a current comparison rate for the remaining term -- a comparison a floating-rate loan structurally has no fixed rate to anchor. The private lender's payout statement invented a 6.50% comparison rate anyway and charged an IRD-style penalty against it.
What the loan agreement actually said
- ▸The private second's own written terms describe its rate as variable, tracking prime plus a fixed spread
- ▸The same agreement's penalty clause specifies three months' interest at the rate in effect at payout -- nothing about a differential
- ▸The 6.50% 'comparison rate' used in the payout statement appears nowhere in the signed loan documents
The private lender was not disputing the loan's own terms -- the payout statement simply applied a penalty mechanism the agreement had never actually adopted.
The numbers
Reading the loan agreement's own penalty clause, rather than accepting the payout statement's invented formula, is the entire source of the $810 difference.
| Two penalty theories, one loan agreement | Amount |
|---|---|
| Invented differential (9.50% - 6.50%), 14 months | $2,520 |
| Three months' interest at 9.50% (the loan's own clause) | $1,710 |
| Difference avoided by reading the agreement | $810 |
| Penalty theory | Monthly figure | Total charged |
|---|---|---|
| Invented IRD-style differential | $180/mo | $2,520 (14 months) |
| Three months' interest per the written agreement | $570/mo × 3 = $1,710 |
Nothing about this is a dispute over arithmetic -- both totals compute correctly on their own terms. The only question that mattered was which penalty mechanism the signed loan agreement actually specifies, and a variable-rate loan with no stated comparison rate cannot support an interest-rate-differential calculation at all.
The solution
A courtier hypothécaire licensed under Quebec's Act respecting the distribution of financial products and services went back to the original loan agreement rather than negotiating from the payout statement's own total.
First, pulled the original private loan agreement's penalty clause. It named three months' interest explicitly, with no reference to any differential calculation.
Second, confirmed the loan was genuinely variable-rate throughout its term, with no fixed comparison rate ever specified anywhere in the documents.
Third, presented the written clause to the private lender and had the payout restated at $1,710, before the consolidation closed.
The outcome
The consolidation funded at $271,710, at 4.85%, with total debt service settling at 37.5%.
Because this file is uninsured, CMHC's ratio maximums do not apply directly; the 37.5% figure is informational.
What to take from this file
- 01A variable-rate mortgage has no fixed comparison rate for an interest-rate-differential to run against. An IRD-style penalty on a genuinely floating-rate loan should raise a question before it is accepted.
- 02The loan agreement's own written penalty clause governs -- not whatever formula a payout statement happens to apply. Read the clause before disputing the arithmetic.
- 03Three months' interest is the standard fallback where no differential mechanism exists in the contract. Confirm the loan actually specifies one before assuming it does.
- 04A private lender inventing a penalty mechanism is not automatically bad faith. It can simply be a template built for fixed-rate loans, applied without checking whether this loan is one.
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:
- ▸9.50% / 6.50% / 4.85% rates — rates move daily and vary by lender; none is a quote.
- ▸the private lender's invented IRD-style comparison rate — not every private lender attempts this; this reflects one lender's own practice, not a universal formula.
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.