Formerly a stipulation for capitalising interest in arrear, turning it into principal and charging interest upon it, however formally expressed, was not allowed to prevail in equity (f), but a stipulation for compound interest is now recognized as valid (g). Such a stipulation will, however, be strictly construed. In the absence of an agreement, express or implied, for compound interest the mortgagee is entitled only to simple interest (h). Where by the terms of the mortgage interest is payable on interest in arrear, but there is no express stipulation that interest on interest shall be paid after the maturity of the principal, it has been held that interest on interest after maturity is not recoverable (i).

A mortgage of leaseholds contained a proviso that if and so often as any interest due under the mortgagor's covenant should be in arrear for twenty-one days after the day appointed for the payment thereof, interest should be treated as an accession to the capital as on the day on which the same ought to have been paid, and should thenceforth bear interest at the rate and on the days provided by the mortgage. The mortgagee entered into possession of the property and received the rents. On the taking of the accounts in a redemption action, it was held that if on the expiration of twenty-one days after any interest became due, the mortgagor not having paid the interest, there was in the hands of the mortgagee, after deducting ground rent and other proper outgoings, an amount arising from the rents received by him sufficient for the payment of the interest, though it had not been actually appropriated to that purpose, the interest could not be said to be in arrear within the meaning of the proviso, and the mortgagee was therefore not entitled to have it capitalized (j).

(e) McGregor v. Gaulin, 1848, 4 U.C.R. 378; Bettes v. Farewell, 1865, 15 U.C.C.P. 450; Patterson v. Dart, 1911, 24 O.L.R. 609.

(f) Mainland v. Upjohn, 1889, 41 Ch.D. 126, at pp. 136 ff.; James v. Kerr, 1889, 40 Ch.D. 449, at pp. 459, 460.

(g) Clarkson v. Henderson, 1880, 14 Ch.D. 348; Salt v. Marquess of Northampton, [1892] A.C. 1.

(h) Daniell v. Sinclair, 1881, 6 App. Cas. 181, 18 R.C. 144; McLaren v. Miller, 1874, 20 Gr. 637; Thomson v. O'Toole, 1888, 21 N.S.R. 1; Richardson v. Jackson, 1897, 34 N.B.R. 301.

(i) Wilson v. Campbell, 1879, 8 O.P.R. 154; Manitoba and Northwest Loan Co. v. Barker, 1892, 8 M.R. 296; Imperial Trusts Co. v. New York Security and Trust Co., 1905, 10 O.L.R. 289. Cf. King v. Keith, 1898, 1 N.B. Eq. 538, and Pringle v. Hutson, 1909, 19 O.L.R. 652, in which effect was given to stipulations for interest on interest after maturity of the principal.

An assignee of a mortgage is not entitled without the mortgagor's concurrence to interest on interest in arrear paid by him on taking over the mortgage (k), and in a suit to redeem a mortgage against an assignee who at the mortgagor's request paid off both principal and interest due at the time of the assignment, it was held that the assignee was not entitled to interest on the sum paid for interest (l).

Where a subsequent encumbrancer pays off a prior encumbrance he is entitled to interest on the aggregate amount paid by him for principal, interest and costs; interest on the principal being allowed at the rate reserved in his own security, but on the interest and costs at the statutory rate only (m).