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Difference between revisions of "Prepayment Rights"
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Prepayment rights for mortgages on land are governed by [https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html#sec10_smooth section 10] of the ''Interest Act'' (Canada). Under that section, consumers have more limited rights of prepayment than for non-mortgage agreements governed by the [http://canlii.ca/t/84mr ''Business Practices and Consumer Protection Act'']. Basically, there is no statutory right of prepayment where the term of the mortgage is five years or less. For example, a borrower does not have a statutory right to prepay a closed mortgage with a three-year term. If the borrower wants to pay out the mortgage, they must negotiate with the lender. In general, lenders are unwilling to allow a mortgage prepayment without at least some additional interest being paid if current interest rates are lower than the rate agreed to in the mortgage. The lender may well insist that all the interest over the term of the mortgage be paid. This makes prepayment expensive and uneconomic, particularly in the early part of the term of the mortgage. | Prepayment rights for mortgages on land are governed by [https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-i-15/latest/rsc-1985-c-i-15.html#sec10_smooth section 10] of the ''Interest Act'' (Canada). Under that section, consumers have more limited rights of prepayment than for non-mortgage agreements governed by the [http://canlii.ca/t/84mr ''Business Practices and Consumer Protection Act'']. Basically, there is no statutory right of prepayment where the term of the mortgage is five years or less. For example, a borrower does not have a statutory right to prepay a closed mortgage with a three-year term. If the borrower wants to pay out the mortgage, they must negotiate with the lender. In general, lenders are unwilling to allow a mortgage prepayment without at least some additional interest being paid if current interest rates are lower than the rate agreed to in the mortgage. The lender may well insist that all the interest over the term of the mortgage be paid. This makes prepayment expensive and uneconomic, particularly in the early part of the term of the mortgage. | ||
Where the term of the mortgage is for more than five years, the borrower effectively does have a right of prepayment. Section 10 of the Interest Act says that if a creditor refuses a prepayment offer, the borrower is not obliged to pay any further interest. There are two important qualifications to this prepayment right: | Where the term of the mortgage is for more than five years, the borrower effectively does have a right of prepayment. Section 10 of the ''Interest Act'' says that if a creditor refuses a prepayment offer, the borrower is not obliged to pay any further interest. There are two important qualifications to this prepayment right: | ||
* the prepayment can only be made after the first five years of the mortgage, and
| * the prepayment can only be made after the first five years of the mortgage, and
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* the borrower has to pay three months’ worth of interest in addition to the principal amount.
| * the borrower has to pay three months’ worth of interest in addition to the principal amount.
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