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Fixed-rate Collateral Mortgages: Good for Banks, Not for Customers

Last Updated on November 10th, 2017

by David Larock

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 expensivecanada mortgage rates 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 thtoronto mortgage ratese 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 conbest mortgage rates torontosider, 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 best toronto mortgage brokerprofits, 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.
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11 Comments
  1. Hey David

    I am glad that you picked up this and blogged about it. I noticed it in the paper last week. What a way to handcuff clients to the bank I hope other banks don’t follow suit.

  2. Here’s the ultimate irony Chris. At the same time that TD is pushing borrowers to register 125% of their home’s current value in order to make future borrowing from TD cheaper and easier, they are quoted in today’s Globe & Mail expressing concern to the that Canadian personal debt levels are “excessive relative to what economic models would predict as appropriate”. Do they really think nobody notices the contradiction?

    Here is the full article FYI: http://www.theglobeandmail.com/report-on-business/economy/excessive-personal-debt-a-concern/article1764981/

  3. So true David… and yet despite this, Canadians love their banks and have blind trust in their bankers that they are serving their best interests. As a mortgage planner you understand the need to take a holistic view of mortgage financing to help your clients. Thanks for sharing the link…

  4. Nothing new. Credit Unions in BC have been doing this for a long time. Don’t know about Ontario system, but collateral mortgages on real estate is a registrable charge at Land Title Office here in BC. It is not a chattel mortgage.

  5. Liang permalink

    Hi Dave,

    I”m an independent Mortgage Broker.

    A client sent me the link to your blogs. You makes the “TD Collateral Mortgage” sound a very very bad thing.

    To be fair, it benefits a lot of people from saving legal fees when refinancing with TD.

    What incentive does TD have to give the best rates when you are renewing? Plenty! it cost them significantly more to get a new customer than retain one. they can offer better rates on retention.

    the bottom line is: there are pros and cons about this. some will benefit from it, and some will be held back by it. People should really assess their own needs.

    Liang

  6. Michele permalink

    I just found out today that National Bank is also doing this, unbeknownst to us. Thankfully, we are saving enough by switching lenders to cover the fees but what an aggravation! and we were never told.

  7. This is a common product among the big 5 banks. Any bank you go to either have the option of register the mortgage for a higher charge, or in some other cases, registering a mortgage/line of credit product together (for up to 100%) that is not transferrable either. I find it interesting that you target one bank instead of doing more research. The bottom line is, the customer has choices and they can discuss with their financial representative and their lawyer when choosing their lender for their mortgage.

  8. Hi Jay,

    There were several reasons why I singled out TD in this post:

    1. While collateral charges are common among the Big Five Banks, they are typically used in cases where borrowers opt for a mortgage that includes a home-equity line-of-credit (HELOC). TD was the first lender in Canada to register all of its fixed-rate mortgages as collateral charges, even in cases where a HELOC was not included as part of their loan.

    2. TD made no public announcement of any consequence to inform borrowers of this material change, and the Bank was deservedly criticized for not adequately educating its customers about the implications of this new policy (this post was part of that barrage). In spite of this, the Bank did not appear to make any real effort to improve its communication to customers at the ground level, to the point where the federal government is now introducing special legislation that is designed to force it to do so. In short, I felt compelled to fairly and properly explain the impact of collateral charges to Canadians when TD would not.

    3. When TD promoted the option to register a mortgage charge for up to 125% of the value of a borrower’s property, the Bank pitched this feature as a way to make future borrowing easier and more flexible. Once again, TD made no meaningful effort to inform borrowers that engaging in this practice would effectively eliminate all other borrowing alternatives for them for the life of their mortgage contract (based on feedback from my clients and on TD’s own communications). I felt that this was a critical detail that was not being adequately disclosed to borrowers, and that’s why I wrote about it in this post. I would add that I have since encountered more than a few TD clients who were shocked and dismayed to find their hands completely tied when TD would not approve their request for additional mortgage financing.

    You write that “the customer has choices and they can discuss with their financial representative and their lawyer when choosing their lender for their mortgage” and my post was written to inform that very discussion.

    Lastly Jay, I note that you posted your comment from an IP address at TD bank. If you are an employee of the bank I would encourage you to raise these issues with senior management in an effort to better inform your customers.

    Thanks for your comment.
    Dave

  9. Robert permalink

    Great post and discussion Dave! 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 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 in fees as you stated.

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

    Thanks!

    Robert
    (Ontario)

  10. Hi Robert,
    Thanks for your note. In answer to your questions:
    1. I think you have captured the key points.
    2. I think that in most cases, the collateral charge should only be registered for the amount of the funds advanced when the deal closes.
    3. In my experience, not a snowball’s chance in Hades!
    4. Yes.
    5. If you want a fixed-rate mortgage only, any non-bank lender will still register your loan as a mortgage charge.

    Best regards,
    Dave

  11. TD put a collateral charge of almost 200% of the borrowed funds against our home, totally locking up the equity. We agreed to this for the sole purpose of getting a large credit line.

    Now TD is telling me they can’t put a credit line on the same collateral charge as our mortgage! WHAT THE HECK!?!?! This is precisely why we agreed to the collateral charge in the first place!

    Why on earth would they register that charge and not be willing to lend more funds on it? I’m bloody fuming mad at them.

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