Criminal Rate of Interest for Ontario Mortgage Transactions: Practical Guide for Private Lenders, Brokers and Real Estate Lawyers

Criminal Rate of Interest for Ontario Mortgage Transactions: Practical Guide for Private Lenders, Brokers and Real Estate Lawyers

Effective January 1, 2025, Canada’s criminal interest rate regime was materially changed. For most mortgage loans in Ontario and across Canada, the criminal rate is now more than 35% APR, calculated in accordance with generally accepted actuarial practices and principles. The rule is federal, under s. 347 of the Criminal Code, and applies notwithstanding provincial law.

The most important commercial mortgage exemption is this: where the borrower is not a natural person, the borrowing is for a business or commercial purpose, and the amount advanced is more than $500,000, s. 347 does not apply. For qualifying commercial loans over $10,000 and up to $500,000, the cap is effectively 48% APR.

Key Scenario Table

What Counts as “Interest”

For s. 347 purposes, “interest” is defined broadly. It includes the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense, paid or payable for the advancing of credit.

For mortgage practice, assume the following may count:

Compliance Checklist for Ontario Private Mortgage Transactions

Drafting Guidelines

Bottom Line

For Ontario mortgage practice, the key question is no longer simply whether the stated interest rate is below the criminal rate. The proper question is:

When all interest, lender fees, bonuses, renewal fees, commissions and credit-related charges are annualized as APR, does the transaction exceed the applicable Criminal Code limit, and does any commercial exemption clearly apply?

For individual borrowers and most residential private mortgages, assume the operative limit is 35% APR. For qualifying corporate/commercial borrowers, the result depends on the amount advanced: 35% APR at $10,000 or less, 48% APR over $10,000 up to $500,000, and no s. 347 cap over $500,000.

With that said, virtually every institutional and private lender should include a comprehensive Savings / Criminal Interest / Read Down Clauses. However, many precedent clauses are outdated because they refer to the old 60% effective annual rate under the former version of s. 347 of the Criminal Code. Following the amendments effective January 1, 2025, the clause should instead refer dynamically to the maximum lawful rate applicable from time to time, recognizing that the applicable limit now depends on the nature of the borrower, loan amount and applicable exemptions.

One should also avoid referring only to the Criminal Code, because there are numerous other federal and provincial statutes that can affect interest recoverability (such as the Interest Act, consumer legislation, usury-type rules, public policy, unconscionability, penalties, etc.). The clause should therefore be drafted broadly.

Finally, one should actually go one step further for private lending precedents and include three separate protections:

1. The savings/read-down clause mentioned above.
2. An actuarial allocation clause, providing that any fee, bonus, lender fee, commitment fee, renewal fee or similar amount is deemed to accrue ratably over the maximum period permitted by law if that treatment is necessary to comply with applicable law.
3. A lender election clause, allowing the lender, if a fee or charge could cause non-compliance, to elect to waive, defer, recharacterize (to the extent legally permissible), or credit all or part of that amount so that the transaction remains within the applicable legal limit without affecting the validity or priority of the loan or security.

Each clause operates independently, so if one is ever challenged, the others continue to protect the lender. One should also include an express non-merger and survival provision within each clause so they continue after repayment and enforcement.

One important drafting point: while a robust savings clause is highly advisable and Canadian courts have often treated such clauses as evidence that the parties did not intend to contract for an illegal rate, it is not a guarantee that a transaction exceeding the statutory limit will always be upheld. Courts will examine the substance of the transaction and the actual amounts contracted for and received. The strongest protection remains ensuring, before funding, that the effective APR and all credit charges comply with the applicable legal regime.

Example clauses (please make sure to have your own lawyer review before applying and this is merely an example and not meant to be legal advice) 

Example Criminal Interest, Savings, Allocation and Preservation of Loan Clauses

1. Savings, Read-Down and Compliance Clause

The parties expressly acknowledge and agree that they intend at all times to comply fully with all applicable laws governing interest, the cost of borrowing, credit charges and the enforcement of loan obligations. Notwithstanding anything contained in this Agreement or in any Mortgage, Charge, Security Document, Promissory Note, Guarantee, Standard Charge Terms, commitment letter, renewal agreement or any other Loan Document, the Lender shall not be entitled to contract for, stipulate for, charge, reserve, receive or retain any amount which, under any applicable federal, provincial or territorial statute, regulation, common law, equitable doctrine or public policy, would constitute interest, a cost of borrowing or consideration for the extension of credit in excess of the maximum amount lawfully permitted.

For purposes of this Section, “Interest” shall be interpreted in the broadest manner permitted by law and shall include, where applicable, all stated interest, default interest, compounded interest, commitment fees, lender fees, brokerage fees, administration fees, underwriting fees, renewal fees, extension fees, servicing fees, standby fees, participation payments, bonuses, discounts, premiums, penalties, commissions, appreciation rights, yield enhancement payments, indemnity payments, reimbursements, legal charges recoverable as consideration for credit, and every other amount whatsoever which any court or regulatory authority may characterize as interest, a cost of borrowing or consideration for the extension of credit.

If, at any time, any provision of any Loan Document would otherwise permit or require the payment or receipt of Interest in excess of the maximum amount lawfully permitted, whether before or after funding, maturity, acceleration, demand, judgment, enforcement or repayment, then:

(a) such provision shall automatically and without further act be deemed amended, modified and read down solely to the minimum extent necessary so that the aggregate Interest payable equals, but does not exceed, the maximum amount lawfully permitted;

(b) the parties irrevocably agree that the Lender shall remain entitled to receive and retain the greatest amount of Interest, compensation and return on its credit risk that is lawfully recoverable under the legislative regime, exemption, borrower classification, loan classification or statutory framework applicable to the particular transaction;

(c) any amount received by the Lender which exceeds the lawful maximum shall, at the Lender’s sole election, be credited against principal, future interest, other Secured Obligations, refunded without interest, or otherwise dealt with in the manner required by applicable law;

(d) no Loan Document, Mortgage, Charge, Security Interest, Guarantee, covenant, default remedy, acceleration right, power of sale right, foreclosure remedy, receivership remedy or other security or obligation shall be rendered void, voidable, illegal, invalid, unenforceable, discharged or impaired solely because any provision would otherwise permit the recovery of Interest exceeding the lawful maximum, it being the express intention of the parties that every Loan Document shall remain enforceable to the fullest extent permitted by law; and

(e) every ambiguity respecting the calculation, allocation or characterization of any payment shall be interpreted, where reasonably possible, in favour of preserving the enforceability of the Loan Documents while permitting the Lender to recover the maximum lawful return available under applicable law.

The Borrower acknowledges that this Section constitutes a fundamental condition upon which the Lender agreed to extend credit and that this Section shall survive repayment, renewal, amendment, refinancing, enforcement, assignment, judgment and discharge of the Loan.

2. Actuarial Allocation, Characterization and Calculation Clause

The parties acknowledge that applicable laws governing the criminal rate of interest and the cost of borrowing may require that Interest be calculated by reference to annual percentage rates, effective annual rates, actuarial methodologies or other prescribed methods of computation.

Accordingly, to the fullest extent permitted by law:

(a) every fee, bonus, commission, lender fee, commitment fee, administration fee, renewal fee, extension fee, servicing fee, discount, premium, participation payment, default charge or other amount payable in connection with the Loan shall, where necessary to comply with applicable law, be deemed earned, accrued and allocated ratably over the period during which the credit is outstanding or over such longer period as may lawfully be recognized under applicable law or generally accepted actuarial principles;

(b) every payment shall be characterized and allocated in the manner that most accurately reflects its commercial purpose while maximizing the amount lawfully recoverable by the Lender;

(c) where applicable law permits more than one reasonable methodology for calculating annualized Interest or the annual percentage rate, the methodology resulting in the greatest lawful amount recoverable by the Lender shall apply;

(d) any fee or charge capable of being allocated between principal, reimbursement, indemnity, administrative cost, actual third-party expense and Interest shall be allocated in the manner most favourable to preserving compliance with applicable law while giving effect to the commercial intentions of the parties;

(e) all Interest calculations shall be determined having regard to all statutory exemptions, classifications, borrower categories, loan categories, thresholds and calculation methodologies applicable from time to time; and

(f) the parties expressly acknowledge that no single payment, fee or charge was negotiated independently of the overall commercial transaction, and all payments shall therefore be interpreted together in a manner that preserves both legality and the maximum lawful economic return intended by the parties.

3. Lender Election, Preservation of Security and Curative Rights Clause

If, before or after funding, the Lender determines, acting reasonably and in good faith, that any fee, charge, Interest rate, bonus, premium, penalty, commission, reimbursement, default charge, escalation, participation payment or any other amount payable under any Loan Document may result in the aggregate Interest exceeding the maximum amount lawfully permitted, the Lender may, without obtaining the consent of the Borrower and without prejudicing any other rights or remedies available to it:

(a) permanently or temporarily waive all or any portion of such amount;

(b) defer payment of all or any portion of such amount;

(c) capitalize, amortize or spread the amount over any period permitted by applicable law;

(d) reallocate or recharacterize payments among principal, Interest, reimbursement, indemnity, administrative expenses or other lawful categories to the extent permitted by applicable law;

(e) credit any excess amount against principal or other Secured Obligations;

(f) refund any excess amount if required by applicable law;

(g) amend the manner in which Interest accrues after the date of such determination;

(h) elect to rely upon any applicable statutory exemption, classification or legislative framework available to the particular Loan or Borrower;

(i) modify the timing or sequence of payments so that the aggregate lawful return is preserved; and

(j) take any other lawful corrective measure reasonably necessary to preserve compliance with applicable law while maximizing the amount lawfully recoverable by the Lender.

Any exercise or non-exercise of the foregoing rights shall not constitute a waiver of default, an amendment of any Loan Document, an election of remedies or a relinquishment of any Security.

No correction, adjustment, waiver, refund, allocation or election made pursuant to this Section shall reduce, impair, postpone or otherwise affect the validity, priority, enforceability or continuing effectiveness of any Mortgage, Charge, Security Interest, Guarantee, assignment, power of sale, receivership right, foreclosure right, judgment or any other security held by the Lender.

These rights are cumulative and are in addition to every other right or remedy available to the Lender under the Loan Documents, at law or in equity, and shall survive repayment, maturity, acceleration, judgment, enforcement, assignment, renewal, refinancing and discharge of the Loan Documents.