Briefing

English Court of Appeal upholds 4% monthly default interest introduction

In Houssein v London Credit Ltd [2026] EWCA Civ 830, the Court of Appeal dismissed the Borrowers’ appeal and gave useful guidance on two recurring property finance issues:

what a borrower must do to stop contractual interest continuing to accrue on a secured loan; and
when a default interest provision will amount to an unenforceable penalty.

The Court of Appeal upheld the High Court’s finding that a 4% monthly default interest rate was not penal, despite expert evidence that it sat at the upper end of market practice.

Background

London Credit Limited (LCL) advanced a bridging loan of about £1.88m to CEK Investments Ltd, owned by Ali and Nuray Houssein (the Borrowers). The loan was secured over residential properties, including the family home and investment properties.

Interest accrued at 1% per month, increasing by a further 3% per month on default, giving a compound default rate of 4% per month.

The dispute arose after LCL alleged breach of a non-occupation covenant. Although the High Court found that LCL had waived reliance on that default for an earlier period, issues remained over interest accrual and the validity of the default interest clause.

Can a Borrower stop interest running without repaying the loan?

The first issue was whether the Borrowers had done enough to stop interest accruing when seeking to refinance in early 2021. They argued that repeated offers to redeem, coupled with LCL’s refusal to accept refinancing proposals, should prevent further interest from accruing. The Court of Appeal rejected that argument.

The Court of Appeal held that interest stops only where the lender has a real opportunity to receive repayment. A borrower must therefore do more than express willingness to pay: it must tender the full amount, have immediate access to the funds, keep them available and remain ready to complete repayment. A mere offer to refinance is insufficient.

The penalty doctrine and default interest

The second major issue concerned whether the 4% monthly default interest rate constituted an unenforceable penalty.

The Makdessi Test

In applying the reasoning in Cavendish Square Holding BV v Makdessi [2015] UKSC 67, the Court of Appeal determined that the question was whether the clause protected a legitimate interest as assessed by an objective party at the time the contract was created, and, if so, whether the detriment imposed was disproportionate to that interest. The Borrowers bore the burden of showing that the clause was penal.

The High Court accepted that LCL had legitimate interests in managing credit risk and the Borrowers’ ability to refinance and repay. The evidence showed that the refinancing strategy was fragile, that relatively small changes in lending conditions or risk could jeopardise repayment. The Court of Appeal accepted that analysis.

The Court of Appeal found that a high interest rate does not of itself necessarily amount to a penalty. Although 2-3% monthly default rates were more common, evidence showed that 4% monthly rates existed at the edge of commercial acceptability. The issue was not whether the rate was high, but whether it was out of proportion to LCL’s credit risk interest.

Held: the Court of Appeal found that there was no flaw in the lower court’s assessment and held that the default interest clause was valid.

Conclusion

This is an important case for both lenders and borrowers. The decision confirms that borrowers must do more than express a willingness to redeem the loan, and that robust default interest provisions may survive challenges where they are commercially justified and proportionate to legitimate lender interests.

The key points are that:

An offer to refinance is not a tender. Borrowers must show funds are immediately available and kept available for repayment.
Clear evidence of actual readiness to pay remains critical.
Substantial default interest rates may be enforceable, if they serve identifiable commercial purposes.
Bridging and specialist finance lenders may rely on broader justifications, including refinancing risk and credit risk management.