In late October 2010, Toronto Dominion (TD) Bank very quietly tweaked the way it registers its mortgage loans.
While this might have at first seemed like a small change (and that’s certainly the way the bank positioned it at the time), it has had a significant impact on the overall borrowing costs of many of TD’s customers since then.
Here is what changed: TD now registers all of its new mortgages as collateral charges [Editor’s note: several of the other Big Six banks subsequently copied TD’s move]. This was an unusual move because while collateral charges are common for mortgages that include home-equity lines-of-credit (HELOCs), they have not been used for mortgage-only loans.
In effect, TD’s move to universal collateral charges has now made it more expensive for borrowers to move to a different lender at renewal under the guise of making it cheaper to borrow more money from them in the future.
This begs the question: 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 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 are registered at the Land Title or Land Registry Office (depending on the province), and 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 (approx. $30), which most lenders will 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 on your property’s title, and this will cost about $800 plus tax. As such, 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 allow TD to register a collateral charge for 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).
Maybe, but this convenience has a downside.
For starters, every lender requires you to buy title insurance that covers the amount of the charge registered on title. As that charge increases, so too does the cost of your title insurance.
Worse still, by giving the bank the legal right to the first 125% of your home’s current value, any equity that you have built up in your home is then worthless as collateral to any other lender.
Here is another example of where TD’s latest change 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 TD has locked up 125% of your home’s value, your only option is to break your current mortgage and re-borrow the entire amount somewhere else.
In addition to having to pay a potentially huge break penalty you will also now incur legal and discharge fees to 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 elsewhere while keeping your existing mortgage and rate in place (with no penalty or discharge costs to worry about). In this example, 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 Six 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). I’m not surprised 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 that 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 its fixed-rate mortgages.
Follow-up note: while TD was the first major bank to adopt this policy, several 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.