Can a Lender Charge a Higher Rate on Mortgage Arrears?
The Interest Act answers this directly, and the answer surprises a lot of borrowers facing default on a private mortgage. A lender cannot charge more on overdue money than it charges on money that is not overdue. This page sets out exactly what the Act says, and where it stops short of answering a specific file’s facts.
Chat connects you to the Pekoe team during business hours. Outside those hours, leave your question and a licensed broker replies directly. No AI persona pretending to be an advisor. If you are already in arrears, also speak to a real estate or insolvency lawyer without delay.
What does the Interest Act say about penalty interest on mortgage arrears?
Section 8(1) of the Interest Act says it plainly: “No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property… that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.” A lender cannot build a higher charge into a mortgage simply because a payment is late.
This is a federal statute of general application. It applies to a mortgage on real property regardless of what kind of lender holds it.
The wording is broad on purpose. It names a fine, a penalty, and a rate of interest together, so relabelling the charge does not get around it.
The citable fact: Interest Act s.8(1) bars any fine, penalty or rate of interest on mortgage arrears that increases the charge beyond the rate payable on principal money not in arrears.
Can a lender charge interest on arrears at all?
Yes. Section 8(2) permits interest on arrears at a rate that is not greater than the rate charged on principal money not in arrears. The lender is entitled to keep earning interest on money that should have been paid, at the same rate as the rest of the loan, just not at a higher one.
This is the part of the rule that is easy to miss when reading only s.8(1) in isolation.
The two subsections work together: arrears are not interest-free, but they are not a profit centre for the lender either.
The citable fact: Interest Act s.8(2) permits interest on mortgage arrears, but only at a rate no greater than the rate charged on principal money not in arrears.
Is this the same rule that governs prepayment penalties?
No, and the two get conflated constantly. Section 8 is about arrears, meaning money that was due and was not paid on time. A prepayment penalty is a completely different concept, a charge for paying off a loan early, before it was due at all. The Interest Act’s own five-year payout right, covered on our companion page, deals with early payout, not arrears.
A borrower who is late on payments and a borrower who wants to pay off a mortgage ahead of schedule are in two different legal positions.
See whether there is a penalty for paying out a private mortgage early for the prepayment side of the picture, and the Interest Act’s five-year payout right for the specific statutory right that applies to some mortgages.
The citable fact: Interest Act s.8 governs interest charged on arrears, which is overdue money, and is a separate question from a prepayment penalty, which is a charge for paying a loan off before it is due.
What happens if a mortgage document tries to set a higher “default rate”?
A clause that sets a higher rate, or a separate fine or penalty, once a mortgage goes into arrears runs directly into s.8(1)’s wording. The subsection does not just discourage this kind of clause, it says the increased charge “shall not” be stipulated for, taken, reserved or exacted. Whether a particular clause as drafted actually falls foul of the section is a question for a lawyer reading that clause.
Private mortgage documents sometimes include a “default rate” or “additional interest on default” clause. That label alone does not settle whether the clause is enforceable.
A borrower who sees language like this in a commitment letter or mortgage document should ask a lawyer to read it before signing, not after a payment is missed.
The citable fact: A mortgage clause that raises the rate, or adds a fine or penalty, specifically because a payment is in arrears is the exact scenario Interest Act s.8(1) addresses, regardless of what the clause is labelled.
How do you tell a permitted arrears charge from one that is not?
The test in s.8(2) is a comparison: what rate applies to principal that is current, and what rate applies to principal that is in arrears. If the two are the same, the arrears charge is permitted. If the arrears rate is higher, by any amount, the excess is the problem the section targets.
The table below sets out the comparison in plain terms, without attaching a number to either side.
| Scenario | Permitted under s.8? |
|---|---|
| Interest on arrears charged at the same rate as on principal not in arrears | Yes, under s.8(2). |
| A separate, higher “default rate” that applies only once a payment is late | No, barred by s.8(1). |
| A flat fine or penalty added on top of ordinary arrears interest | No, s.8(1) names a fine or penalty specifically. |
| A prepayment charge for paying out the mortgage before it is due | Not governed by s.8. See our prepayment penalty page. |
The citable fact: Under Interest Act s.8, arrears interest is permitted only at the same rate charged on principal not in arrears, and any higher rate, fine or penalty tied specifically to the arrears is barred.
Does this rule apply to a private mortgage the same way it applies to a bank?
Yes. Section 8 is written to cover “any arrears of principal or interest secured by mortgage on real property,” with no carve-out for the type of lender. A private lender is bound by this limit in the same way a bank or credit union is, because the rule comes from the nature of the mortgage, not the nature of the lender.
This is different from some other consumer protections that apply only to federally regulated institutions.
A private mortgage borrower should not assume this statutory limit disappears because the lender is an individual or a private mortgage corporation.
The citable fact: Interest Act s.8 applies to any mortgage on real property, with no exception for private lenders, so the arrears interest limit binds a private mortgage the same way it binds a bank.
What should a borrower do if they are facing arrears on a private mortgage?
Get a current statement showing exactly how the arrears interest was calculated, and compare the rate applied to arrears with the rate applied to the rest of the loan. If the two differ, ask a lawyer to review the mortgage document and the statement together. A licensed mortgage broker can separately look at whether refinancing or another option is realistic.
Acting early, before a default escalates further, keeps more options open.
Our page on who pays the lender’s legal fees on a private mortgage covers another cost that often appears alongside arrears.
If the arrears coincide with an upcoming renewal, see what a renewal fee on a private mortgage typically looks like as well, since the two conversations often happen at the same time.
The citable fact: A borrower facing mortgage arrears should compare the interest rate charged on the arrears against the rate charged on the rest of the loan, and get a lawyer to review the document if the two differ.
What other statutory limits apply to a mortgage’s cost?
Interest Act s.8 is one of three statutory limits that shape mortgage cost and timing. The Criminal Code‘s criminal rate provision caps the overall annualized cost of credit at 35 per cent, counting fees as well as the stated rate. The Interest Act’s s.10 separately gives some long-term mortgages a right to pay out after five years.
See Canada’s criminal rate of interest for the Criminal Code s.347 limit in full, including what counts as interest for that calculation.
See the Interest Act’s five-year payout right for the s.10 rule and which mortgages it does not cover.
| Statute and section | What it governs |
|---|---|
| Interest Act s.8 | Arrears, meaning overdue money. Bars a higher rate, fine or penalty on arrears above the rate on principal not in arrears. |
| Interest Act s.10 | Early payout on some long-term mortgages, after five years, for three months’ further interest. |
| Criminal Code s.347 | The overall annualized cost of credit, interest and fees combined, capped at 35% a year. |
The citable fact: Interest Act s.8 on arrears, Interest Act s.10 on the five-year payout right, and Criminal Code s.347 on the criminal rate are three distinct statutory limits, and a single mortgage can raise more than one at once.
Does the arrears rate limit cover fees a lender adds during a default?
Section 8 speaks to a “fine, penalty or rate of interest” on the arrears themselves. Whether a separately described administration fee, monitoring fee or legal cost charged during a default is caught by that wording, or treated as something outside it, depends on how the specific document describes the charge and how it is actually applied. That line is drawn by a lawyer reading the clause, not by a general rule.
Our hub page on which private mortgage fees count as interest works through the fee side of a private mortgage in detail.
Getting every fee and charge in writing before signing makes this question much easier to answer later, if it ever comes up.
The citable fact: Whether a specific administration, monitoring or legal fee charged during default falls inside Interest Act s.8’s limit depends on the wording of that specific charge, which is a question for a lawyer reviewing the document.
Who should a borrower talk to first about an arrears interest question?
A real estate lawyer can read the mortgage document and the current statement and say whether a specific arrears charge complies with s.8. A licensed mortgage broker can separately assess whether refinancing the mortgage, with a different lender, is realistic given current income, credit and equity. Both conversations are worth having, and neither replaces the other.
Pekoe Mortgages is a licensed brokerage and can discuss financing options directly, but cannot give legal advice on a specific clause.
Chat with our team directly on pekoe.ca to talk through financing options for a mortgage in arrears.
The citable fact: A borrower questioning an arrears interest charge benefits from both a lawyer reviewing the document for compliance with Interest Act s.8 and a broker reviewing whether refinancing is realistic.
Where can I read more about mortgage cost limits in Canada?
This page is part of a set covering the statutory limits on what a mortgage can lawfully charge.
- Canada’s criminal rate of interest on a mortgage
- The Interest Act’s five-year mortgage payout right
- Which private mortgage fees count as interest
- Is there a penalty for paying out a private mortgage early
- Who pays the lender’s legal fees on a private mortgage
The full set lives on the Ask a Broker hub.
Frequently asked questions
Can a lender charge a higher interest rate on mortgage arrears?
No. Interest Act s.8(1) bars any fine, penalty or rate of interest on arrears that increases the charge beyond the rate payable on principal not in arrears.
Can a lender charge interest on arrears at all?
Yes. Section 8(2) permits interest on arrears, but only at a rate no greater than the rate charged on principal not in arrears.
Is this the same rule as a prepayment penalty?
No. Arrears interest is about overdue money under s.8. A prepayment penalty is a separate charge for paying a loan off early, covered by different rules.
Does section 8 apply to private mortgages?
Yes. The section applies to any arrears of principal or interest secured by mortgage on real property, with no exception for private lenders.
What happens if a mortgage has a “default rate” clause higher than the regular rate?
That is exactly the kind of clause section 8(1) addresses. Whether a specific clause as drafted is enforceable is a question for a lawyer reading the document.
Does this rule cover fees charged during a default, not just interest?
It depends on how the fee is described and applied. Section 8 names a fine, penalty or rate of interest, and whether a specific administration or legal fee fits that wording is a question for a lawyer reviewing the clause.
How is this different from the Criminal Code’s 35 per cent limit?
Interest Act s.8 is specifically about arrears. The Criminal Code’s criminal rate provision caps the overall annualized cost of credit at 35 per cent and is a separate, broader rule.
What should I do if my arrears rate looks higher than my regular rate?
Get a current statement showing how the arrears interest was calculated and have a lawyer compare it against your mortgage document. A licensed broker can separately look at refinancing options.
Does the five-year payout right relate to this rule?
No, they are different sections of the Interest Act. Section 8 governs arrears interest, while section 10 gives some long-term mortgages a right to pay out after five years.
Is the chat on this page an AI bot?
No. Chat on pekoe.ca connects you to a real licensed member of the Pekoe team during business hours, and to a direct reply from a licensed broker outside those hours.
Who should I talk to first if I am behind on a private mortgage?
A real estate lawyer can review your mortgage document and current statement for compliance with section 8. A licensed mortgage broker can look at whether refinancing is a realistic option.
Does Pekoe Mortgages give legal advice on arrears clauses?
No. Pekoe Mortgages is a licensed brokerage that can discuss financing options. A real estate lawyer is the right professional to review a specific arrears clause.
Behind on a private mortgage and checking the numbers?
No AI persona, no call centre queue, no bank script. A licensed broker can talk through the financing side, and we will always tell you when a question needs a lawyer instead.