The New TD Collateral Mortgage

TD Bank has always considered itself to be at the forefront of change in Canadian banking. And it has that big green Easy Chair that’s designed to make you feel comfy and safe doing business. But TD has also pulled some major boners they’ve had to back away from and it’ll be interesting to see if the public can put enough pressure on the bank, once again, to make it change its tune.

Last week TD Bank announced that effective October 18 all new TD mortgage will be registered as collateral mortgages instead of as the conventional mortgages with which Canadians are familiar. This move is either a bold one setting a new trend (ouch!) or an act of desperation seeking to lock customers in. Time will tell.

So what exactly is 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. These aren’t new in Canada. Typically a collateral mortgage is registered for a secured line of credit, allowing the balance of the loan to float up or down depending on the customer’s use.

A “normal” conventional mortgage let’s you establish a set amount you are borrowing, the rate for the term you have chosen (say 4% for 3 years) and the amortization so you’ll know exactly when you will have the whole kit and kaboodle paid off. You know what your payments will be for the term and if you stay on track the property is yours at the end of the amoritization. Should you need to borrow more using a second mortgage or by registering a home equity line of credit you can. If you don’t borrow any more money against the property, the principal balance on a conventional mortgage goes only one way: down. And Canadian major chartered banks will accept “transfers” of conventional mortgages from one to the other at little or no cost.

The primary security on a collateral mortgage is a promissory note with a lien on the property for the total amount registered so you can register far more debt against the property than the property is worth. In the case of the TD Bank’s new approach, they are registering 125% of property value, even though that amount may not have been advanced to the borrower initially. (This is a very creative way to get around the government’s new guidelines designed to stop lenders from over-lending to clients on their mortgages.) Since the collateral mortgage allows for the “re-advancing” of principal, like a revolving line of credit, the balance can rise, and very often does, with most people ignorant about the holes they are digging for themselves. Most chartered banks will not accept “transfers” of collateral mortgages from other chartered banks, so you have to pay a whack more fees to register a new conventional or collateral mortgage if you decide to move to a new lender.

Effectively, collateral charges allow lenders to change the interest rate and/or loan more money to qualified borrowers after closing. All you’ll likely have to do to trigger an increase in interest rate is miss a payment. That’s can’t happen with a traditional mortgage. But since the collateral mortgages are being registered with rates as high as prime + 10% (regardless of what they initially offer you), lenders will cover their potential losses by juicing the rates if they get a whiff of potential default.

Based on what I’ve seen from dumb borrowers, if they’re offered the option of being able to get at more and more money to scratch their consumer itch, they will. We’re a easily-led lot, and this is a product designed to lead you further and further into debt. And keep in mind that you don’t have to be bad with money to make this happen. Just be married to a Money Moron and watch all your “security” evaporate.

A big “oh-oh!” on collateral mortgages comes at renewal. Now that The Bank has you by the short-and-curlies, they can offer you whatever rate they choose and your options are to suck it up or pay significant legal fees to get the hell out of Dodge. So is this a ploy on TD’s part to ensure retention of new customers? With the competitive pressure to win and keep business at an all time high – the real estate markets are a tad off these days – this could be a case of “golden handcuffs”. Sure, they’ll let you have access to more money if you need it at no extra cost, but if you ever want to take advantage of a better offer, oops!

Another pile of poop into which you may step by signing up for a collateral loan involves the other debt you may have. Under Canadian law a lender may seize equity to cover other debt you have with the same lender. So, in essence, you’re securing all your loans – be they credit cards, lines, car loans, or overdraft – that you may have with The Bank with your collateral loan.

TD isn’t the only bank to offer collateral mortgages. I’ve been getting letters from folks for years about these. Credit unions use them. The Royal Bank has a “readvanceable mortgage,” which is a collateral mortgage.  Scotiabank’s STEP is also a collateral mortgage I believe. What’s different about the TD Bank is that they are totally eliminating all other choices for consumers. Hey, whenever a retailer tells you that you only have one choice, you should walk away!

Keep in mind that you’ll still have to qualify as a borrower to take advantage of the extra borrowing power that’s been dangled before your eyes with the collateral mortgage. If the bank changes its qualifying criteria, you may not. And with a collateral mortgage wrapped around your property, no one else is gonna touch you! If The Bank does see fit to lend you more money, there’s no telling what rate you’ll have to live with.

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.

The questions you have to ask yourself are these:

1. Are you prepared to tie yourself to the TD Bank to the end of your amortization — 25, 30 or 35 years?

2. If you want to switch down the road, are you prepared to pay hefty fees?

3. Do you trust the TD Bank enough to believe they won’t screw you over? (Remember when they changed the rules on their lines of credit? How about when they started dipping into people’s accounts to grab money for outstanding credit card debt? All well within their rights. All a tad smelly.)

4. Are you intending to use your home as a constant source of credit, or do you actually want to get that sucker paid off?

For chrissakes make sure you read the fine print on these new collateral mortgages. If you go into them with your eyes shut, you’re just asking for trouble.

Would I buy one of these suckers? Not on your life! Do I look like a mouse to you?

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Gail Vaz-Oxlade

Gail Vaz-Oxlade wants YOU! Join MyMoneyMyChoices.com to get smarter about your money and help others get smarter about theirs. Isn’t it time we eliminated financial illiteracy? Come find me on Google+ and on Twitter.

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110 Responses to “The New TD Collateral Mortgage”

  1. To ex-viewer,

    If you want a secured line of credit, then a collateral mortgage is fine… but to register ALL mortgages as collateral charges doesn’t help the borrower…

    When and if you go in to borrow or refinance, you lose leverage to negotiate by having not being able to transfer out your mortgage to another Bank… and TD knows this…

    Getting the best rate at that time will be even more difficult…

    Why is TD and now ING, taking away that choice? For the borrower’s benefit or for the Bank’s? I think the answer is obvious…

  2. avatar Gabby P. Says:
    March 8, 2012 at 4:22 pm

    @Steeve Garganis: Why do you say ING takes away your choices?

  3. Thanks for the simple explaination and heads up! Much appreciated.

  4. avatar Jennifer Says:
    April 30, 2012 at 7:57 pm

    Thanks for the info. I’m glad to have seen this blog before making my decision. This gives me something more to think about. I’ve been looking at the rates that the different lenders were offering; one of them being TD. Thanks again.

  5. Hi, Thanks for sharing,

    I am a mortgage Broker, I work for you, to find the best mortgage solution possible.
    It is in your best interest to take your time when deciding what type of mortgage works best for you and where you are going to get it from. Having your own personal mortgage consultant means that you have your own personal specialist working for you. I will make you feel comfortable, answering all of your questions so that you take your time deciding on the right mortgage solution for you. Rather than going to the bank and being treated like a number, let me help find the best mortgage solution for you.

    Peter Motem

  6. From an economic and business stand point, in addition to the consumer’s, coupled with the given recession, a few additional points must be understood to fully understand the two sides to this story.

    Firstly, the Canadian banking system is the most sound in the world. To non-believers out there what this means is that the 5 major banks of Canada and their employees’ #1 goal is to ensure consumers money is peace of mind protected (with help from CDIC), conveniently accessible (thanks to the various channels of banking) and regulated by a government who genuinely cares and proudly supports the financial health of it’s nation. To be able to trust that your bank is doing everything in their power to provide consumers that level of confidence is how it should be. That the consumers’ hard-earned dollar is not only valued and business appreciated but is protected.

    Secondly, consider some of the economic issues Canada is experiencing. The recession has caused the unemployment rate to increase, the bank of Canada and banks prime rate has been the lowest in 75 years as low as 2.25% increasing back to 3% and remaining there since September, 2010, corporations have down-sized, stock markets have experienced a decline due to companies sufferings losses or negative growth, consumer debt has increased due to cost of living being spent on credit after exhausting their savings, the list goes on. The US and it’s NINJA Lending, an acronym for No Income No Job or Assets, and their economic influence to Canada, taught corporations and consumers not only in Canada but worldwide a very valuable lesson – what action do we need to take to ensure this is avoidable for future generations. Generations of consumers have lived through the 1929 stock market crash, wars, medical breakthroughs, technological advancements, etc. but we as consumers can not avoid a recession? What are we teaching ourselves let alone our children? That it is more important to spend than save? That along with providing a better way of life for our families comes with the high price of debt? The economy has evolved to experience it’s own life cycle – with birth comes death, with strengths come weaknesses, with growth comes decay, etc, hence the bubble bursting effect we have all heard about. Having an understanding of what only hurts us makes us stronger, the Canadian banking system has leveraged that experience in an effort to make the necessary changes so that future generations do not suffer what consumers have historically as well as since 2008.

    Lastly, from the business stand point, consider the definition and purpose of a bank – a financial institution where consumers deposits are used to invest, lend, access, etc.. Having said that, the funds deposited are owned by the consumer, held at the bank but not owned by the bank. Banks offer products and services which in turn cost consumers fees much like any other place of business specializing in selling products and services to the public. Having that key corporate responsibility to the consumers in which they do business where protecting those assets is the highest priority, has aided in deriving the best possible solution of ensuring that goal is achieved going forward. Ask any consumer who has ever applied for a car loan, that while during the application process it was understood that said vehicle being purchased be used as collateral to obtain that loan or a lien be in place to protect the lender of said borrowed funds. Any consumer, company, corporation who is in the business of lending others’ money will advise that it be wise to set in place a legal requirement to protect said funds from a loss. Let us face it, consumers have lost confidence in investing in any avenue other than real estate. Why? Because they know that with acquiring that debt, they have more importantly to them, acquired an asset – home for their family, rental property, etc.. From understanding the economy, a key driver comes from transactions involving the purchasing and selling of real estate, whether it be residential, commercial or industrial, the economy would be worse off without it’s influence.

    In conclusion, I ask you Gail Vaz-Oxlade, if you ran your own bank, held others’ deposits and were in the business of lending out their money with the goal of protecting that money, how would you go about gaining their trust, confidence and business in order to help turn a profit while stimulating the economy, ultimately avoiding future generations to suffer recessions?

    Thank you to those who read and understood my explanation because as I’ve lived and read about in other countries in the world, there’s no better country I’d rather stand up for than Canada – including the government which has helped to achieve the most sound banking system in the world and doing their very best to uphold that fact.

  7. Thank you so much for the update.

    Greatly appreciated. I am shocked.

  8. Great post. I used to be checking constantly this blog and I am inspired!

    Very useful info particularly the ultimate phase 🙂 I handle
    such information a lot. I used to be seeking this particular info
    for a very lengthy time. Thanks and best of luck.

  9. I’ve been doing extensive research on all the HELOC products out there so I can make an informed decision. They all seem to be collateral charges which if I understand things correctly, present these main downsides:

    A. Removes secondary financing ability if the charge % is too high.

    B. Gives bank too much power by allowing them to secure all other current and future credit products the customer has with them under the one collateral charge. So customer has to pay out all the products (credit card, auto loan, LOC, mortgage) in order to switch lenders. Also if they miss a payment on a credit product the bank can foreclose on house or apply your mortgage payment to cover it.

    C. More costly to switch lenders – approx $1000 from what I’ve read.

    D. If you use too much of the HELOC you ruin your credit score and can’t get credit.

    Here are my questions:

    1. Are my understanding of the downsides correct? Did I miss any?

    2. What % of collateral charge is ok to still keep the door open for secondary financing? 80% LTV?

    3. About problem “B”, BC lawyer Kenneth Pazder wrote on another blog that he instructs his clients to get a letter from the bank saying “notwithstanding the terms of the mortgage, unless otherwise agreed by the borrower and the bank, no other indebtedness (save the mortgage loan and/or line of credit component as the case may be) shall be secured by the mortgage charge.” Will banks agree to sign this and would this solve problem B?

    4. Another option to solve problem B is to not have any other credit products with the bank holding the collateral charge mortgage. Do you agree?

    5. Any way to stop the credit score nose dive by actually USING your HELOC?

    6. Which of the banks/lenders out there (if any) are the better option for reducing the downsides of a collateral charge?

    Thanks!

    Robert
    (Ontario)

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