The TD bank has been caught, ‘with their pants down’ once again. This time CBC’s Marketplace went undercover last week to see how transparent it was about collateral mortgages and the fine print associated with them. According to the segment TD earned failing grades.
We were the first brokers to warn clients and our readers about the pitfalls of these mortgages when they were introduced by the TD and other banks as well. For a refresher, the banks are now registering a mortgage at 125% of the value of your home. It doesn’t matter what you owe but that amount is a lien against your property.
The biggest problem we see, is when a collateral mortgage combines the unsecured debt like a credit card, line of credit and car loans. If a mortgagor defaults on their unsecured debt, the bank can exercise power of sale. So in other words, unsecured debt becomes secured in the far reaching powers of the bank.
We have seen the fall out from this product where homeowners just about lose their homes after falling behind on a visa card or a line of credit. This is just way too much power in the hands of the banks. And not disclosing this to clients is really reprehensible. The feds late last year ordered banks to provide full disclosure to their clients about collateral mortgages but it’s clear there are those who are not.
The problem with these mortgages as well is they are not transferrable. In other words, you cannot transfer them to another lender without cost. This now requires a lawyer to discharge the collateral mortgage and the client must pay to leave. We see this as handcuffing the client by not allowing them to shop their mortgage for the best rate and terms. What happens when a bank know you can’t go any where else for a new mortgage without incurring costs. They won’t be competitive because they know they have your business. In contrast, a normal mortgage based on the amount borrowed alone can be switched to a new lender with no cost to the homeowner. We do these all the time.
And of course, what happens if a client wants to tap into their equity and the bank who has the collateral mortgage says NO. Now the client is forced into a penalty just to access their own equity with another lender.
Collateral mortgages are good for the bank’s retention and that is what they are after, holding on to you and your paycheque for life. But we think it’s not in the favour of the homeowner and can even set them up for disaster if any unforeseen circumstances happen.