Loan contracts often have firm repayment terms. In some cases, it is in the lender`s best interest to delay repayment of the loan, usually to benefit from a high interest rate. In order to guarantee interest payments at high interest rates for the duration of the term, the loan agreement may include a pre-provision. Under this provision, even if an advance payment may be admitted, the lender has the right to recover the amount of interest that would otherwise have been paid during the term of the loan. The possibility for borrowers who, under a loan agreement with a advance clause, are then subject to a claim, is that the advance penalty is not recoverable by the lender. However, borrowers should be careful not to deliberately fulfill their obligations in order to avoid the severity of a pre-clause in the loan agreement. Such deliberate conduct may provide a sufficient basis for the application of a pre-clause that would otherwise not be applicable. Another way to offset pre-financing risk (which represents a reinvestment risk) is often a prepayment penalty clause in the loan agreement.  The “soft” advance conditions may allow for a prepayment without penalty if the house is sold.
“Severe” down payment conditions do not allow for exceptions without penalty. Justice Fitzpatrick addressed the issue at length. It took into account the rules applicable to contractual interpretation, the usual meaning of “prepayment,” U.S. and Canadian decisions on advance payment rules, and the circumstances set out in the evidence. It ultimately concluded that the advance provision should have its clear and ordinary meaning in the loan agreement and that, in the present circumstances, the pre-fine was not recoverable by the lenders. It left the door open to a pre-payment clause formulated accordingly, which would allow the recovery of an advance penalty, even if the maturity date of the loan had been accelerated by a request for default by the borrower. A homeowner decides to refinance a two-year-old mortgage with a balance of $250,000. If there is a 4% advance fine, the owner would pay $10,000 to the original lender to pay the mortgage in advance.
Borrowers should be aware of the specificity of the advance penalties imposed by their lender; they can significantly increase the cost of refinancing a mortgage or selling a home.