A potential court ruling allowing payments to increase on Variable Rate Mortgage as interest rates rise could lead to huge costs and even bankruptcy to consumers who have selected this type of mortgage.
In an era of low interest rates, consumers were induced into buying homes they sometimes could not afford by being offered mortgages at a very low and attractive interest rate. The problem was this interest rate was not guaranteed beyond an initial period. These mortgage are called Variable Rate Mortgage and Adjustable Rate Mortgage.
The mortgage contract did not contain an explicit limit on how much the mortgage rate could be increased, which means in today’s and tomorrow’s high-rate environment they are potentially lucrative to the lenders and a significant liability for the consumers who took them.
Many consumers have purchased such mortgages several years ago and some of the lenders are in court to force the consumers in accepting the mortgage payment increases.
If the court decides in favor of the lenders, Canadian consumers could incur significant payment increases and even face bankruptcy in a worst-case scenario, according to one expert witness.
If lenders are permitted to make large increases in mortgage rates and payments on Variable Rate Mortgages, the consumers would, in a worst-case scenario, face unlimited and un-hedgable liabilities, be unable to pay their bills, and even be unable to support and provide for their families, which would obviously negatively impact the society at large.
Lenders addressed that possibility in an affidavit, arguing that it wouldn’t make sense for them to make large increases to mortgage rates because, “It would be contrary to the lender’s interests for the mortgage holders to become insolvent or otherwise unable to pay its obligations …”
The cases raise interesting legal issues, especially in light of recent Supreme Court of Canada decisions in unrelated income tax cases.
In Canada (Attorney-General) v. Fairmont Hotels and Jean Coutu Group (PJC) Inc. v. Canada (Attorney-General), both issued in 2016, the court severely limited the application of “rectification” (termed “reformation” in the U.S.), an equitable remedy whereby a court orders a change in a written document to reflect what it ought to have said in the first place.
Making the implied limit on the size of of mortgage rates increases for Variable Mortgage actually explicit would be an application of the rectification remedy in this case. But that may be an even more remote possibility here.
The Banking Industry has also weighed in, seeking intervenor status (recently granted) to bolster the arguments of its members, and to clarify the mortgage rates legal issue for the industry.
This is a parody of the following text http://business.financialpost.com/investing/side-accounts-could-bring-life-insurance-giants-to-their-knees
Imagine if consumers were to ask relief from the court stating that mortgage rates increases should be limited because it could bankrupt them, we would all say, it’s too bad. You selected a variable rate signing the mortgage contract and now you have to honor it even if it bankrupts you. We would not expect the Courts to help these mortgage holders.
This is what the insurance industry wants the Courts to do. They made tremendous profits selling these life policies but now that the financial environment is not in their favor, they want relief.
