On October 18th TD Canda Trust launched a new type of mortgage that makes it easier for homeowners to tap into their equity. It is called a ‘Collateral’ mortgage charge which is registered at 125% of the home’s value. In other words let’s say your home is valued at 300,000 and you only borrow $150,000: the mortgage is registered on tityle at $375,000.
We should point out that several banks are starting to use the collateral mortgage product, but on a more selective basis, not across the board as in the case of TD Canada Trust.
To the uninformed, the collateral(CM) mortgage may seem like a good idea, however the reaction from our industry has been very negative, as it has from home media sources as well. the CM has as its primary security, a promisary note as ‘back up’ or collateral security. It allows for a re-advancing of the principal, like a revolving line of credit does. On the surface, it sounds good making it “EASIER’ new credit in future, and you don’t have to go anywhere else right? While true, the fact is you ‘CANNOT’ go anywhere else(to another lender) without incuring significant costs to get out of this mortgage, and you cannot ‘switch’ your mortgage to another mortgage lender, because lenders in general do not ‘accept’ collateral charges of any sort from other institutions.
The truth of the matter is that with the CM, the bank has ‘significantly greater’ control over your future ability to access credit, be it a mortgage, a loan, line of credit, and potentially new credit cards as well. You see, with what loks like a $375,000 mortgage registered on title, it appears that you have zero equity. It is more expensive to register a ‘Collateral Mortgage Charge’ than a ‘normal’ mortgage, and it is more expensive to discharge it as well, and you pay for this, not the bank. Secondly, what you may or may not be tolds that you cannot register a second mortgage, ever, and there is also fine print that ‘allows’ the bank to increase the rate of interest they charge you(at their discretion of course) up to ‘PRIME PLUS 10%. That’s right! Which would be 13%(on your secured mortgage) based on today’s prime. Critics point out that with this action of ‘juicing’ up the rate that the banks can require from you in the future,(at the bank’s sole discretion, without your ‘permission’) that this is similar to that of credit card companies doubling or tripling the interest rate charged on a credit card when the client is late on ‘MAKING A PAYMENT’ twice in the same year. So if you sign for one of these (CM) mortgages, God help you if you ever run into trouble, i.e. job loss etc., because your mortgage interest/payments can skyrocket, and if that were to happen, you would likely to be forced into default, with the bank making excessive profit at your expense. We should also remind you of the actions some banks took during the ‘credit crisis’ last year, when they ‘upped’ the interest rate(arbitrarily we should add) by one per cent on lines of credit, to all credit holders. Why? To help their profit margins. Fortunately, many consumers simply left, cancelling their LOC and went to another institution. Leaving your CM will not be nearly as easy.
So we ask, can the banks arbitrarily increase the rate on the new CM a person has signed, withoutm that person doing anything wrong? Well it certainly looks that way, and if so that is downright scary.
With common knowledge that the banks characteristically send out renewal notices, close to the maturity dates, offering less than best rates, and leaving existing clients with little time to shop elsewhere, the new CM product appears to give the banks an even better opportunity to charge higher renewal rates since it is both more ‘expensive’ to switch to another institution, and it is also more ‘difficult’ to do so. We have serious concerns about such a CM product. It gives the banks powers that go well beyond that of a traditional mortgage. We are concerned that the borrower may not fully understand the ‘downside’ aspects(or be aware of them at all), and that by the time they get to their lawyer’s office to sign, everything is done and ready to close, so it is too late to start over. Also cheaper ‘in house’ bank closing services when used especially in the case of new CM’s will leave the borrower without any ‘independent legal advice’ whatsoever, and that is really scary.
From our viewpoint, it would appear the client’s ‘options’ are in fact ‘diminished’ rather than ‘enhanced’ as the bank may want the consumer to believe. Quite clearly, with a CM, the consumer’s choice is limited, and some may think also anti-competitive, since a CM in our opinion, increases the borrower’s exposure to potentially significant and catastrophic loss.