Interest Only Promissory Note Template for Canada

An Interest Only Promissory Note allows you to structure a loan where you pay only interest during the term while deferring the principal repayment until the end. This arrangement can provide significant cash flow benefits for borrowers while offering lenders predictable interest income with a balloon payment at maturity.

When do you need this document?

You need this document when entering into a loan arrangement where immediate principal payments would strain cash flow. Real estate investors often use these notes for property acquisitions, allowing rental income to service interest while building equity. Business owners frequently utilize them for expansion financing, where the investment takes time to generate returns. They're also common in bridge financing situations where you expect a future liquidity event, such as a property sale or business exit, to repay the principal. Private lenders may prefer this structure for higher interest rates while maintaining principal protection.

Key legal considerations

The interest rate must comply with Canada's criminal rate provisions, which prohibit rates exceeding 60% per annum. Under the Interest Act, if the interest rate exceeds 5% annually, it must be expressed as a yearly percentage to be enforceable beyond 5%. The note should clearly define payment dates, default consequences, and acceleration clauses. If secured, you must comply with provincial Personal Property Security Act requirements for perfecting security interests. Consider including guarantor provisions, especially for corporate borrowers, and ensure proper witnessing and notarization requirements are met. Default remedies should be clearly outlined, including the lender's right to demand immediate payment of principal and accrued interest.

Legal requirements in Canada

Federal legislation governs key aspects of promissory notes in Canada. The Bills of Exchange Act establishes the formal requirements for negotiable instruments, while the Interest Act mandates specific disclosure requirements for interest calculations. Provincial Limitations Acts set time limits for enforcement, typically six years from the maturity date. If the note is secured, provincial Personal Property Security Acts require proper registration to maintain priority over other creditors. Consumer protection legislation may apply if the borrower is an individual using funds for personal purposes. The note must be in writing, signed by the borrower, and clearly state the principal amount, interest rate, and repayment terms. For corporate borrowers, ensure the signing party has proper authority, and consider requiring corporate resolutions authorizing the debt.