The Unintended Consequences of Canada’s New Criminal Interest Rate: Why Private Mortgage Lending Just Got Harder
Most Canadians likely think of predatory lending as something they’ve seen on TV or in the movies. A character who is down on their luck, and has one last chance to save their family home or their partner’s business makes a deal with a seedy-looking lone shark for the money they need.
In real life, predatory lending is where lenders use deceptive tactics and other schemes to try to get borrowers to take out a loan. While the media loves to paint a picture of private lenders as predatory loansharks, that is hardly the case. While private lenders may charge a higher rate on their services, for many borrowers those services are absolutely necessary and the rates match the risks taken by the lenders.
As of January 1, 2025, the rules in Canada around predatory lending and criminal interest rates have changed significantly, and even though most private lenders are not and have never been predatory, it’s making business harder for them to the detriment of the borrowers. Here’s the fine print, along with some thoughts from our firm:
The Criminal Code Has Changed
The changes actually come under the Criminal Code of Canada (the “Code”) under section 347, which relates specifically to high interest rates. The maximum interest rates were previously calculated as an EAR, or effective annual rate, which takes into account compounding interest through the year to reflect the true cost of borrowing.
The previous allowable rate under the Code was 60% EAR, which translated to roughly 48% APR. The APR, or annual purchase rate, is the rate that most borrowers are more familiar with. If a loan has an APR of 5%, for example, borrowers will pay 5% of the principal per year in interest, along with any fees.
When translated to the APR, the previous 60% EAR cap was 47.9%. Now, the new federal maximum is 35%. There are, however, three key exemptions: Commercial Loans, Pawnbroaking Loans, and Payday Loans. For the purpose of this article, we will only review the exemption that affects private mortgages loaned to commercial borrowers. However, if a payday loan or pawnbroking loan happens to be a product you service or are a recipient of, Sari Rose Law can assist you with that as well.
Commercial Loans
The maximum APR remains at 48% for commercial loans between $10,000 and $500,000 where the loan is for a commercial or business purpose, and the borrower is a corporation and not a person. There is no criminal interest rate cap for those same loans in excess of $500,000, however commercial loans under $10,000 are subject to the 35% cap.
What This Means for Lenders and Borrowers Alike
The government claims that the change in legislation was intended to protect the most vulnerable Canadians who could easily fall victim to predatory lending practices. Those who lend at the maximum interest rates have an easy propensity to take advantage of borrowers looking for a miracle, but who instead end up embroiled in a nightmare.
The problem, though, is that the legislation has set out to solve a problem that rarely (if ever) existed. The reality is that most small loans are not only not predatory, but the new cap on interest rates barely covers fees to engage in that sort of transaction. Let’s look at an example:
Michelle owns her own home, but has run into a significant repair issue and insurance will not cover doing a full repair to fix the root cause. If Michelle wants to fix things permanently, she needs $25,000 - money that she does not have up front, and given her credit history she will need to secure a private loan.
Under the old rules, a lender could have charged up to 60% on that loan - earning them $15,000 on a one year term. Even after legal fees and lender’s fees were taken off that amount, it still would have been a profitable business venture for a small lender and Michelle would be approved for the required funds, even though fees that high would be exceptionally rare.
Now with the change in legislation, that interest rate is reduced to almost half, leaving them only $8,750 - a less worthy return and split between all of the professionals involved. At those rates it is much harder, if not impossible, to have those loans ensured by title insurance companies. The ultimate result is that private lenders are becoming less incentivized to participate in these transactions at the same time that more and more Canadians, who are struggling to qualify for traditional bank loans, need them most.
To add a further complication, the legislation is written in a way that makes things even more confusing. The law states that interest must be calculated through ‘actuarial accounting methods,’ which would require the involvement of an actuary. This only serves to add a further expense on an already narrow margin, and one that most lenders will be unwilling to spend.
At Sari Rose Law, we focus on supporting the private lending world from every angle and strongly believe that private lenders have a distinct place in supporting those who simply cannot get much-needed loans otherwise. You can count on us to do the work to help design much needed loans that fit within the new legislative amendments, even despite their restrictive nature, for the benefit of all parties. Contact us today to set up a consultation with our firm.
