New numbers suggesting brokers are increasingly comfortable putting clients into collateral charge mortgages speak either to their naiveté or myopia, said a broker with longstanding concerns about that increasingly popular product.
“Probably what’s happening here is that the brokers that are sending these deals don't know or aren’t thinking about the long-term consequence of the readvanceable mortgages for their clients,” Larry Frondall, a broker and underwriter for several MICs, told MortgageBrokerNews.ca. “It’s short-sighted.”
The comments come on the heels of the new D+H market report, suggesting TD grew its share of broker business by nearly two percentage points. The country’s second biggest bank now restricts its offerings to collateral charge mortgages, a move that drew a firestorm of criticism from brokers late last year.
While those feelings may have subsided for some, Frondall isn’t among them.
"With readvanceable mortgages, the lenders are doing it to offer the client something else down the road,” the industry veteran said. “The problem is that the need for that something down the road doesn’t come about until the client hits some trouble and then the bank is unwilling to readvance the funds.
“The fact that the lenders has registered the loan for the full value of the property – or even for more – means that the borrower is unable to go elsewhere for a much needed refinance.”
While readvanceable mortgages allow clients to re-borrow the principal they’ve paid off on their mortgage, up to 80 per cent of the value of the property, and to avoid upfront legal costs, they also allow the lender to register a collateral charge on the home usually for 100 per cent of the value. That effectively means the mortgage must be entirely discharged in order for a borrower to transfer it to a new lender at renewal or for refinancing.
Most mono-lines and banks – as well as private lenders – refuse to accept the transfer of collateral mortgages, forcing homeowners to pay additional fees to register a new conventional or collateral mortgage in order to move the loan from the lending institution.
None of that should encourage brokers to do more of those types deals, said Frondall.
Not all brokers agree, pointing to HELOCs.
While, they aren’t for all clients, “they do have a place in the broker arsenal of products,” said Gord McCallum, owner of First Foundation Residential Mortgages in Edmonton. “It’s important that the broker really understand the client needs in order to determine if the HELOC is appropriate.”