In our foreclosure practice, we occasionally encounter borrowers who think they’ve stumbled upon a way to get rid of get rid of the interest on their mortgages. We are happy to set them straight, and the courts are on our side.
The issue is the application of Section 6 of the Interest Act, federal legislation which is indeed applicable to all mortgages. The Interest Act is a complicated and non-intuitive piece of legislation that is challenging to even lawyers to understand, so it’s not surprising that ordinary people read it wrong.
Here’s the actual wording of Section 6:
“Whenever any principal money or interest secured by mortgage on real property or hypothec on immovables is, by the mortgage or hypothec, made payable on a sinking fund plan, on any plan under which the payments of principal money and interest are blended or on any plan that involves an allowance of interest on stipulated repayments, no interest whatever shall be chargeable, payable or recoverable on any part of the principal money advanced, unless the mortgage or hypothec contains a statement showing the amount of the principal money and the rate of interest chargeable on that money, calculated yearly or half-yearly, not in advance.”
Perfectly clear, right? Hardly! The confusion arises from the reference to “any plan under which the payments of principal money and interest are blended”. Many, if not most, modern mortgages have a single payment which is applied to both the interest and the principal of the debt. Borrowers may think this means they have a “blended” payment, which would mean that no interest is chargeable unless they receive a statement showing the rate of interest chargeable calculated yearly or half-yearly, not in advance. If their interest is calculated monthly, these borrowers may conclude they’ve found a legal loophole to get out of paying interest.
However, “blended” in the Interest Act, doesn’t mean the standard mortgage payment that is applied to both principal and interest. The Supreme Court of Canada clarified that more than 50 years ago in Kilgoran Hotels Ltd. The Supreme Court considered that the purpose of this section of the Act was to protect borrowers from being unable to determine the true rate of interest being charged. With that in mind, the court determined that “blended” meant “mixed so as to be indistinguishable”. When considering a payment made on a mortgage, where a rate of interest is stated in the mortgage, and a payment is applied to both interest and principal, it’s a matter of basic mathematical calculation to determine how much of each payment is being applied against interest and how much to the principal. For that reason, the payment structure of most modern mortgages is not a “blended” payment.
Although it dates back to 1968, Kilgoran Hotels continues to be good law. It was most recently applied by Justice Graesser in his 2015 decision in David v. Canadian Premiere Mortgage Corporation. In that case, a borrower in a foreclosure action tried to argue that the lender should be barred from collecting interest by the provisions of s. 6. Justice Graesser revisited that ever-so-tricky word “blended” and found, as the Supreme Court did before him, that the math could “scarcely be simply” to calculate the true interest rate of the mortgage.
At Hendrix Law, we argue these cases regularly when borrowers feel they’ve found a clever loophole. Fortunately for lenders, the meaning of “blended” when it comes to mortgage payments doesn’t mean what borrowers think it means.