Betsy Carstairs

The New TD Collateral Mortgage

Posted by Gail | Filed under Credit Wise

TD Bank has always considered itself to be at the forefront of change in Canadian banking. And it has that big green Easy Chair that’s designed to make you feel comfy and safe doing business. But TD has also pulled some major boners they’ve had to back away from and it’ll be interesting to see if the public can put enough pressure on the bank, once again, to make it change its tune.

Last week TD Bank announced that effective October 18 all new TD mortgage will be registered as collateral mortgages instead of as the conventional mortgages with which Canadians are familiar. This move is either a bold one setting a new trend (ouch!) or an act of desperation seeking to lock customers in. Time will tell.

So what exactly is a “collateral mortgage?” It’s a loan attached to a promissory note and backed up by the collateral security of a mortgage on a property. These aren’t new in Canada. Typically a collateral mortgage is registered for a secured line of credit, allowing the balance of the loan to float up or down depending on the customer’s use.

A “normal” conventional mortgage let’s you establish a set amount you are borrowing, the rate for the term you have chosen (say 4% for 3 years) and the amortization so you’ll know exactly when you will have the whole kit and kaboodle paid off. You know what your payments will be for the term and if you stay on track the property is yours at the end of the amoritization. Should you need to borrow more using a second mortgage or by registering a home equity line of credit you can. If you don’t borrow any more money against the property, the principal balance on a conventional mortgage goes only one way: down. And Canadian major chartered banks will accept “transfers” of conventional mortgages from one to the other at little or no cost.

The primary security on a collateral mortgage is a promissory note with a lien on the property for the total amount registered so you can register far more debt against the property than the property is worth. In the case of the TD Bank’s new approach, they are registering 125% of property value, even though that amount may not have been advanced to the borrower initially. (This is a very creative way to get around the government’s new guidelines designed to stop lenders from over-lending to clients on their mortgages.) Since the collateral mortgage allows for the “re-advancing” of principal, like a revolving line of credit, the balance can rise, and very often does, with most people ignorant about the holes they are digging for themselves. Most chartered banks will not accept “transfers” of collateral mortgages from other chartered banks, so you have to pay a whack more fees to register a new conventional or collateral mortgage if you decide to move to a new lender.

Effectively, collateral charges allow lenders to change the interest rate and/or loan more money to qualified borrowers after closing. All you’ll likely have to do to trigger an increase in interest rate is miss a payment. That’s can’t happen with a traditional mortgage. But since the collateral mortgages are being registered with rates as high as prime + 10% (regardless of what they initially offer you), lenders will cover their potential losses by juicing the rates if they get a whiff of potential default.

Based on what I’ve seen from dumb borrowers, if they’re offered the option of being able to get at more and more money to scratch their consumer itch, they will. We’re a easily-led lot, and this is a product designed to lead you further and further into debt. And keep in mind that you don’t have to be bad with money to make this happen. Just be married to a Money Moron and watch all your “security” evaporate.

A big “oh-oh!” on collateral mortgages comes at renewal. Now that The Bank has you by the short-and-curlies, they can offer you whatever rate they choose and your options are to suck it up or pay significant legal fees to get the hell out of Dodge. So is this a ploy on TD’s part to ensure retention of new customers? With the competitive pressure to win and keep business at an all time high – the real estate markets are a tad off these days – this could be a case of “golden handcuffs”. Sure, they’ll let you have access to more money if you need it at no extra cost, but if you ever want to take advantage of a better offer, oops!

Another pile of poop into which you may step by signing up for a collateral loan involves the other debt you may have. Under Canadian law a lender may seize equity to cover other debt you have with the same lender. So, in essence, you’re securing all your loans – be they credit cards, lines, car loans, or overdraft – that you may have with The Bank with your collateral loan.

TD isn’t the only bank to offer collateral mortgages. I’ve been getting letters from folks for years about these. Credit unions use them. The Royal Bank has a “readvanceable mortgage,” which is a collateral mortgage.  Scotiabank’s STEP is also a collateral mortgage I believe. What’s different about the TD Bank is that they are totally eliminating all other choices for consumers. Hey, whenever a retailer tells you that you only have one choice, you should walk away!

Keep in mind that you’ll still have to qualify as a borrower to take advantage of the extra borrowing power that’s been dangled before your eyes with the collateral mortgage. If the bank changes its qualifying criteria, you may not. And with a collateral mortgage wrapped around your property, no one else is gonna touch you! If The Bank does see fit to lend you more money, there’s no telling what rate you’ll have to live with.

Some mortgage brokers are a little unhappy with this recent turn of events, referring to the new TD collateral mortgage as a “mousetrap” and the low rates they’ll use to attract unsuspecting customers as the “cheese.” Not a bad analogy.

The questions you have to ask yourself are these:

1. Are you prepared to tie yourself to the TD Bank to the end of your amortization — 25, 30 or 35 years?

2. If you want to switch down the road, are you prepared to pay hefty fees?

3. Do you trust the TD Bank enough to believe they won’t screw you over? (Remember when they changed the rules on their lines of credit? How about when they started dipping into people’s accounts to grab money for outstanding credit card debt? All well within their rights. All a tad smelly.)

4. Are you intending to use your home as a constant source of credit, or do you actually want to get that sucker paid off?

For chrissakes make sure you read the fine print on these new collateral mortgages. If you go into them with your eyes shut, you’re just asking for trouble.

Would I buy one of these suckers? Not on your life! Do I look like a mouse to you?