Monday, June 20, 2011

Let's check your Line of Credit

TD’s Customer Retention Strategy - Collateral Mortgages

Last year TD Canada Trust announced they will be registering all of their mortgages as collateral mortgages. What does this mean for the consumer?

TD has instituted some very popular banking changes in the last few years....extended banking hours and opening branches on weekends to name a few. With the announcement of registering all of their mortgages as a collateral mortgage they were trumpeting it in the media as a major win for consumers....but is it really?

First let’s talk about what makes a collateral mortgage unique.

Unlike a traditional mortgage a collateral loan is made up of a promissory note backed by a lien registered against the property. If you have a line of credit registered against your home, chances are you already have a collateral mortgage. They certainly are not new in Canada and have been used for years......mostly for home equity lines of credit.

So what makes a collateral mortgage different? The way the mortgage is constructed is ideal for a line of credit because it allows the balance of the mortgage to float up and down. A traditional mortgage has the terms of the loan (amount, amortization, rate and term) clearly outlined and registered against the property and does not really allow for changes to these terms. As you make your monthly payments the balance of the loan goes in one direction....down. On the other hand, a collateral mortgage allows you to register the value of the mortgage for as much as you want. In TD’s case they will go up to 125% of the value of the property.

This makes it easier for you to access the equity in your home at a future date. Since the loan is already registered at the higher value, it is just a matter of advancing the client more money without having to alter the terms of the registered mortgage which saves time and money.

Sounds great right? Not really. There is a big downside to collateral loans which makes them very unattractive in most situations. Simply, collateral mortgages take away your choice. Upon renewal with a traditional mortgage the client is able to shop around and possibly move their mortgage to a new lender with a more attractive rate or product. The legal work is minimal and is usually covered by the new lender free of charge. However, the more complicated structure of a collateral loan takes quite a bit more legal work and is therefore not covered by the new lender. In short, it is going to cost the customer money to get a better rate. TD is betting most clients will not want to incur this expense and will stay with TD even with a less attractive rate.

The collateral structure allows the bank to change the terms of the loan after closing. This can be helpful if you want to borrow more money, but can also be quite helpful when the bank wants/needs to change your interest rates. In some cases, missing a payment can trigger an increase in your rate.

As well, for some, having easier access to the equity in their home can be a slippery slope. TD would like people to think the collateral mortgage is all about customer service, but in reality is about customer retention. With any mortgage you should always read the terms carefully and know exactly what you are getting.

For more information on collateral mortgages please visit or contact Invis Mortgage Broker, Brad Compton at 416-671-2183.

David Pylyp This was a small change that has gone un-noticed by a number or people until they need to adjust their lines of credit or change lenders. It is always advisable to have your financing reviewed by an independent third party. Always great advice.

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