What Is a Default Interest Rate?
Most Florida mortgage notes contain a provision that increases the interest rate when the borrower defaults on the loan. This elevated rate is called the default interest rate (sometimes called the "penalty rate" or "default rate").
For example, a commercial mortgage may carry a standard interest rate of 6%. The note specifies that upon default, the rate increases to 11%. This 5% increase can add hundreds of thousands of dollars to the total amount owed, dramatically increasing the lender's recovery and the borrower's pain.
Common Triggers
- Missed Payment — Failure to make a mortgage payment within the grace period (typically 10-15 days).
- Maturity Default — Failure to pay off the loan balance when it matures (common in commercial balloon mortgages).
- Covenant Default — Violating a loan covenant, such as failing to maintain insurance, allowing property taxes to become delinquent, or breaching a DSCR requirement.
- Bankruptcy Filing — The borrower files for bankruptcy, which may trigger a default under the note.
Florida Enforceability
Florida courts generally enforce default interest rate provisions in commercial loans as long as the increase is not so extreme as to constitute an unenforceable penalty. The key test is whether the default rate is a reasonable estimate of the lender's increased costs and risks due to the default. A jump from 6% to 11% is typically enforceable. A jump from 6% to 30% may be struck down as an unconscionable penalty.
Related Terms
- Mortgage — The loan document containing the default rate provision
- Foreclosure — The enforcement proceeding where default interest accrues
- Deficiency Judgment — The post-foreclosure claim that includes accrued default interest
Barnes Walker Loan Negotiation
Barnes Walker's commercial real estate attorneys negotiate default interest rate provisions before loan closing, capping the rate increase to protect our borrower clients, and enforce default rate provisions on behalf of our lender clients when borrowers fail to perform. Request a legal inquiry for assistance.
Florida Law Reference
Fla. Stat. Ch. 687
Limits the maximum interest rate that may be charged on loans in Florida. The general usury limit is 18% for loans under $500,000 and 25% for loans of $500,000 or more.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC