This week, Toronto Dominion (TD) Bank very quietly tweaked the way it registers its mortgage loans. While this may at first seem like a small change (that’s certainly the way TD has positioned it), the impact for many TD customers will prove significant over time. Basically, the Bank has decided to register all of its mortgages as collateral charges. While this is common for lines of credit and variable-rate mortgages, it is unusual for fixed-rate loans. In effect, TD is making it cheaper for you to borrow more money from them in the future, while at the same time making it more expensive and more difficult for you to move to different lender. This begs the question: once TD has its customers locked-up, what incentive does it have to offer aggressive pricing? Put another way, if the threat of switching lenders is your best way to negotiate a fair deal at renewal, what happens to your leverage when the bank neutralizes that threat by making it far more expensive to leave than to stay?
First, a little background. There are two ways a lender registers a loan when your home is used as the security: as a standard charge or as a collateral charge. Standard charges, which are registered at the Land Title or Land Registry Office (depending on the province), can be registered, transferred or discharged. That means that if you want to switch, or transfer, your mortgage to another lender at renewal, you can do so for minimal cost (aprox. $30), which the lender will usually cover. Collateral charges are registered under the Personal Property Security Act (PPSA) and can only be registered or discharged (not transferred). If you have a collateral mortgage and want to change lenders, you need to re-register a new mortgage and this will cost about $800 + tax. So in future, switching your fixed-rate mortgage from TD to a different lender at renewal will cost you a little under $1000.
But that’s just the tip of the iceberg. Borrowers are also being encouraged to register up to 125% of the current value of their home when they take out a mortgage with the Bank. The pitch is that doing this makes it cheaper to borrow more money from TD in the future (because the charge does not have to be re-registered). This way, even if your house goes up in value, you can tap into that extra equity without having to consult anyone other than your TD Bank rep (assuming you qualify). How convenient. Unfortunately though, this convenience has a downside. By giving TD the legal right to the first 125% of your home’s current value, your collateral is worthless to any other lender.
Here’s a hypothetical example of where this new feature could come back to bite you. Let’s say you needed to borrow 75% of the current value of your property and after hearing TD’s pitch you decided to let them register a collateral charge of 125%. Assume then that two years later with your wife on maternity leave and a new baby to support, you are having trouble making ends meet. You contact TD to apply for an increase in your credit line, but with your credit score impacted by some recent missed payments, they decline your request. You contact a mortgage broker who has numerous alternatives for you to consider, but because 125% of your home’s value is locked-up with TD, your only option is to pay out your current mortgage and re-borrow the entire amount. This creates a cost of almost $1,000 to discharge and re-register a new mortgage, and of course, with a temporarily low credit score you won’t be able to qualify for the best rates anymore. Had you financed your original fixed-rate mortgage with almost any other lender, they would have registered your loan as a 75% mortgage charge instead, and you could have easily added secondary financing while keeping your existing mortgage and rate in place (with no discharge costs to worry about). In this scenario, the difference in overall cost is easily in the thousands of dollars, and that’s without assuming that all of this could be happening in a rising interest-rate environment.
If you’re surprised that TD would design a product this way, don’t be. It’s not easy making $1 billion+ in net income every quarter and since mortgages account for about one-third of the Big Five banks’ retail profits, this is a cash cow that has to be milked. Today about two-thirds of Canadians still walk into their local bank branch for mortgage advice and most of them sign whatever is put in front of them. Why wouldn’t TD take advantage of this by registering your mortgage in a way that makes it cost prohibitive to ever get off of their comfy green chair? Especially when borrowers won’t even realize what they’ve traded off until years later? Squeezing a little more profit out of mortgage customers isn’t new. It’s tried all the time, for example, by offering renewing mortgage customers posted rates (one-third of whom actually sign back the offer), or by pushing mortgage life insurance, which is the worst form of life insurance ever invented. I’m not surprised that TD is trying to maximize its profits, but I am surprised when customers place their blind trust in the hands of an organization that has proven to be world-class at achieving this end (here is a CBC Marketplace segment on the topic.)
One final thought. In retail banking, three is the magic number. The odds say that if a bank can sell you three products, you will be theirs for life, probably because the cost and hassle of switching become too prohibitive. Since most bank mortgages are based on fixed rates (which are, to no one’s surprise, more profitable), registering them as collateral mortgages makes it easier, and cheaper, to sell customers other products like lines of credit and secured credit cards (to get to the magic number three). The question for you to consider is, does being viewed as “a customer for life” help or hurt your negotiating leverage, especially when the bank knows how much it will cost you to leave?
If you want my advice, consider TD’s stock, but think twice about their fixed-rate mortgages.
Follow-up note: while TD was the first major bank to adopt this policy, all of the other major banks have since followed suit. It’s too bad that these lenders have decided to adopt a policy of using collateral mortgage charges across the board when it seems entirely inappropriate for many of their borrowers. I can only assume that they did this to improve profitability, which may well be the case until enough customers start voting with their feet! As always, forewarned is forearmed.David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.