Changes To Mortgage Prepayment Rights Under the Interest Act (Canada)

The Government of Canada recently enacted new regulations under the Interest Act (Canada) (Act) which expand the class of "prescribed entities" that are not entitled to the statutory prepayment rights accorded to borrowers by section 10(1) of the Act. These new regulations, which will significantly impact the practice of commercial mortgage lending throughout Canada, apply to mortgages and hypothecs granted on or after January 1, 2012.

Background

Prior to January 1, 2012, section 10(1) of the Act provided, in effect, that a borrower (other than a corporation or joint-stock company) could prepay a closed mortgage loan with a term exceeding five years at any time after the first five years of the term upon payment of a penalty equal to three months' interest. This provision was originally enacted in 1880 to ensure that individuals were not locked into long-term mortgages with high interest rates, with no ability to prepay without incurring significant penalties.