Automatic Renewal Clauses in Mortgages: The Cost to Renew or Not to Renew

While most borrowers will, prior to the date their mortgage becomes due, shop around for a better interest rate or negotiate a better rate from their existing mortgage lender, others will do absolutely nothing, not even respond to their lender’s letters warning them their upcoming mortgage balance is shortly due. These lender’s letters, in most cases, will warn the borrower that, should the borrower not respond, their mortgage will automatically renew at a higher interest rate.

In a recent Ontario Superior Court of Justice class action case, Vistoli v. Haventree Bank (2024 ONSC 3785), the lead plaintiff was one such borrower whose mortgage was in good standing but ignored letters from her mortgage lender, Haventree Bank (“Haventree”), advising that should she not respond before her mortgage came up for renewal, her mortgage would automatically renew for a one year open term at its current interest rate plus 4%. With no response from the borrower, pursuant to the standard charge terms contained within the mortgage, Haventree automatically renewed the mortgage at the higher interest rate stipulated in its letters. The standard charge terms provided that the initial loan may “be renewed for the term and at a rate for automatic renewals we set out in the renewal notice we sent you.”

It should be no surprise that when given the opportunity to change an interest rate, the lender will prefer an interest rate higher than what was originally agreed. In this case, the original interest rate was 5.37%. Following the 4% interest rate increase upon renewal of the mortgage, the interest rate jumped to 9.99%. As a result, payments under the mortgage increased, the borrower defaulted on the mortgage, and the borrower was forced to sell her house to pay off the mortgage.

While this class action lawsuit settled without Haventree being found liable for any of the claims advanced by the lead plaintiff, in her Statement of Claim, the lead plaintiff argued that Haventree breached both legislation and contracts with its borrowers. One of the key legislative provisions the lead plaintiff argued had been infringed was Section 8(1) of the Interest Act (Canada) which specifies that “no fine, penalty or rate of interest shall be [charged] on any arrears of principal or interest secured by a mortgage…that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.”

However, in the Supreme Court of Canada case Krayzel Corp. v. Equitable Trust Co. (2016 SCC 18), the Court determined that an interest rate increase triggered by the “passage of time (and not by default),” did not offend s. 8(1) of the Interest Act. In Krayzel Corp. v. Equitable Trust Co., where the borrower had consented to the terms in the renewal agreement, including the interest rate, the interest rate increase was determined not to offend s. 8(1) of the Interest Act. As such, interest rate increases after a mortgage is due, such as those incurred in a renewal agreement, are not necessarily unlawful.

The lead plaintiff further argued that Haventree was in breach of contract by its unilateral imposition of automatic renewal terms. While Haventree had notified the borrower prior to the expiry of the mortgage of the higher interest rate that would be charged upon an automatic renewal, the lead plaintiff argued that the bank was at fault for not specifying in the standard charge terms for the initial loan agreement exactly the rate of interest that would be charged upon an automatic renewal, and for hiding the automatic renewal clause in the lengthy standard charge terms. As a result, insufficient notice of the automatic renewal terms was given to the borrower when they signed the initial loan agreement. It is general practice in Canada for the lender to increase the interest rate upon an automatic renewal of the mortgage. As such, it is questionable whether burying the automatic renewal clause in the standard charge terms and not specifying the interest rate to be charged upon an automatic renewal differs enough from general automatic renewal practice for Haventree’s interest rate increase to be illegal.

While we will never know how the Ontario Superior Court of Justice would have weighed in on the lead plaintiff’s allegations, the lead plaintiff was successful in having Haventree pay a settlement amount of $1,500,000 to the class members in the class action as well as their fees and expenses. Unfortunately, at most, this settlement amounted to $5,000 for each borrower, which is not a large amount for an individual who has lost their property by reason of mortgage default.

The key takeaway for borrowers is to carefully review the automatic renewal terms when signing their mortgage documents. For lenders, they might consider making the automatic renewal clause a discussion point during the mortgage approval or closing process. At Wildeboer Dellelce LLP, when acting for commercial lenders and borrowers on mortgage transactions, we are sensitive to these types of clauses in the transaction documents and will strive to meet our client’s objectives and get them the best results.

If you have any questions about this content, please contact the authors Paul De Francesca at [email protected] or Amanda Carpenter at [email protected]. The authors gratefully acknowledge the assistance of summer student Karla Ledesma in the preparation of this update.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact to us.