TD and the Change to Collateral

October 26th, 2010

Folks,

Some of you may have caught this subtle announcement made by TD. I was stunned when I saw it. I can only view it as a nail in the coffin for TD.

What was the announcement?
TD Canada Trust made the announcement that effective October 18th, 2010, they will be registering all new mortgages as collateral mortgages instead of as conventional mortgages.

In and of itself, most of you may think… meh, what’s the big deal? Collateral, conventional… both start with the letter “C” how different can they be? Mortgage is a mortgage, isn’t it?

Um. No.
Why? Well first let’s start with a definition of a collateral mortgage:
It’s a loan attached to a promissory note and backed up by the collateral security of a mortgage on a property.

Well, that clears it right up doesn’t it? It seems more “flexible” from that definition. At least more flexible from the lenders perspective.

Just so we’re clear, this is not anything radically new in the market. We’ve had collateral mortgages for years…decades in the industry, only they’ve *ALL* been associated with home equity lines of credit (HELOC). So far so good. They even try and help the consumer by registering on title for the *FULL* value of the property (based on an appraisal), but only allow access to 80% of the equity.
The idea behind this is so that a few years down the road, client decides he/she would like to refinance, no need to go through all the bother of re-registering on title, the lender simply allows an increase to the limit up to the previously registered full value (which in most cases will probably still work out close to 80% of present day value, given a consistent rise of 5% per year in the value of most homes).

All is well right? So far so good?
Well, let’s take a quick look at a few “downsides” to this collateral mortgage.

First off, in my industry, we have this odd habit of trying to switch your mortgage from banks (our competitors) to primarily mortgage lenders. For the most part for conventional mortgages, ever major lender is willing to accept a conventional mortgage from any other lender.
With a collateral mortgage… all bets are off. So for starters if you or your mortgage professional decides to move you to another lender, we go from a cost free switch to a refinance situation, regardless of balance, equity, value, etc.

For example, you live in a $250K home with a mortgage of $150K. Your mortgage lender does something stupid and you decide to take your mortgage elsewhere. Normally, no fee, no charge the new lender picks up where the other left off. That’s a conventional mortgage deal.
Now with a collateral, the new lender looks at what’s registered on title ($250K) and looks at your request to switch for $150K and says the two don’t match. We now need an appraisal ($300) to confirm the value and we need a lawyer to deregister the existing charge (collateral) and register a new one (read -double the cost for your lawyer or $700-1000).

Some may say, OK $1000+ to get rid of a lender you’re really not happy with. If you are like my wife, “I’m not paying a red cent to my lawyer for something that should have been done right the first time.” The lawyer should have explained to me that I’m kind of “stuck” with this lender unless I’m willing to pay “extra” for the privilege of having a collateral mortgage come end of term or time to switch.

The lender also being aware of this cost (or disincentive) at renewal time will only offer a posted rate or just below (very little discount), figuring you don’t want to incur the extra cost to switch.

Did I mention that banks are in the business of making money? And that they are really good at it?

If that’s not enough to discourage you, how about this one. You sign up for what you believe is a fixed mortgage rate. Fully discounted and you start budgeting around that monthly number. The interesting thing about the collateral mortgage is the lender can (and in all likelihood will if rates suddenly rise) raise your rate AFTER you’ve closed on your deal. There’s nothing stopping them from changing the rate.

If you don’t believe this part, just ask anyone who has had HELOC with TD and when they decided to unilaterally change the offset to prime that they charge from 50 basis points (bps) to 75 bps. Major uproar for those that had this product, but it was spelled out in black and white in the contracts they signed. Lender reserves the right to change without notice… the interest rate (terms) of the loan.

Doesn’t that give you a warm fuzzy? If things aren’t going well for the bank, we’ll they’ll just charge everyone more!
They conceivably could go as high as prime PLUS 10% (not bps, percent).

The next item is a little bit more subtle. You have a collateral mortgage with TD. You also have a car loan and a VISA with them. Say you run into a bit of financial trouble (job loss, health, etc.). Under Canadian law, a lender may seize the equity to cover other debt you have with the same lender.
So in essence, you’re possibly securing all your loans that you have with that financial institution; be it credit cards, unsecured lines of credit, car loans, or overdraft etc.
If you have equity and you get into trouble, TD can, and will, be paid out first as a secured creditor. Leaving you to deal with the other creditors and answering why you paid TD off in full before them.

And the upside to having a collateral mortgage… well we’re still trying to find one.

Well for me, I’ve never been a big fan of TDs residential mortgage arm. Now I have a very clear reason not to use them ever again.

I need to do a little more research, but I believe Laurentian is the only one that offers a HELOC as part of their Home Owner Kit (HOK) that is registered as a single conventional mortgage charge (thus both a mortgage & HELOC under one).
I mention this one specifically, as I also tend to promote folks getting into the “Smith Maneuver” or using your HELOC to invest to get a tax deductible interest.

I know for a fact that Scotia and their STEP product, register both a conventional AND collateral on title as two separate items, which is why I would never consider this product for any of my clients. Can’t switch the conventional mortgage out as there is a collateral also registered. Both have to be paid out and a new mortgage registered.

TD has switched, Scotia with their STEP program have been doing it for awhile now… RBC & their HomeLine product (same as Scotia’s as far as I can tell). That’s 3 of the big 5… just a matter of time before they all switch and create their own “mortgage for life” with collateral registrations.

Let’s hope the lawyers are paying attention to this and advising (warning) their clients not to go this route. Although it appears to be business as usual at TD.

That’s the fun for this week.

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