TD Canada Trust surprised the mortgage community by announcing significant changes to the way they will register mortgages starting Oct 18, 2010. Instead of the previously used and widely accepted standard mortgage charge, TD will register every new mortgage as a collateral charge mortgage.
What’s the difference anyway?
Depending on who you talk to, you may hear that the differences are more technical and the collateral mortgage does offer some advantages, others say they wouldn’t touch a TD mortgage anymore, not even with a 10 feet pole.
By definition collateral charge is something that you put up against a loan. Collateral can be a car, jewellery, real estate, anything tangible with a proven value that the bank can sell and recover the loan in case you fail to keep up with payments. Secured line of credits is a collateral charge, because they are secured usually by a real estate property.
The standard mortgage charge is also secured by the real estate property. Than what’s all the fuss about it? It comes down to the details in the small print.
Standard charge mortgages are registered with the Land Registry Office of the province. The principal amount, the interest rate and the amortization period are clearly stipulated in the charge. The intention of the borrower is to get that principle paid down to zero at the end of the amortization period. Standard charge mortgage can be discharged and transferred to another bank for a small fee (usually covered by the other bank).
Collateral charges on the other hand are registered under the Personal Property Security Act. As a result they can be discharged, but not transferred. The amount owning fluctuates and the rate charged can be changed. There is no stipulated intention when the loan should or will be paid out. To transfer a collateral charge mortgage, it must be paid in full.
For TD mortgage holders that simply mean that at the time of renewal if they want to switch to another lender, they have to re-register their mortgage which will cost legal fees (around $1,000 or so).
There is more. TD employees are encouraged to register the collateral charge at up to 125% of the value of the property. That is presented as a benefit to the customer in case he/she wants to borrow more from TD in the future. How much more? Up to 125% of the value of the property? Don’t fool yourself. First, the bank would extent extra credit ONLY if the customer qualify according to their lending guidelines. And second, the amount of that credit, the interest rate and other conditions would be determined by the sole discretion of the bank. Such approach doesn’t leave much room for negotiations.
By signing on a collateral mortgage charge you are actually authorizing a revolving secure line of credit or a “refinancing for a later date” which will not cost you even a cent. If that sounds wonderful to you, keep in mind that you are also limiting severely your options to shop around for better mortgage rates in the future. Why so? Since your mortgage is not transferrable, to switch to a lender with better rates your collateral mortgage has to be paid in full and re-registered as a standard charge mortgage triggering all the applicable legal cost. On top of that, if you have taken advantage of the line of credit already and the value of your property has not appreciated much, then you may not be able to leave TD at all, because you may not meet loan-to-value criteria of the new lender. Isn’t that a troublesome thought…
But that is not all. The collateral charge allows the bank to legally increase the mortgage rate by up to 10.0% in case the borrower gets into trouble with the regular payments. Ouch!
When you start thinking about it, the picture becomes gloomier and gloomier. Being a collateral charge mortgage, similarly like your car loan, the way you service the loan will be reported to the credit bureau. A missed or late payment will be reported and it will adversely impact the credit rating of the borrower. Damaged credit rating may not only close the door to other lenders, but also may cause TD to refuse further increases of the line of credit attached to the mortgage.
TD is doing what any bank wants to do – trying to increase the client retention. Once you are in, it imposes conditions that make it costly to leave. Once you have the mortgage with TD, at renewal time they don’t have to offer you a preferred, or “best rate”, because you are more or less forced to accept any offer or pay to go elsewhere. Gail Vaz-Oxlade put it nicely on her blog: “Some mortgage brokers are a little unhappy with this recent turn of events, referring to the new TD collateral mortgage as a ‘mousetrap’ and the low rates they’ll use to attract unsuspecting customers as the ‘cheese’. Not a bad analogy”.
Yes, TD Canada Trust wants you as a customer for life and if you dare to compare what other financial institutions offer, be prepared to pay up.
Think twice before sit on that comfortable green chair.