Few products ignite broker debate like collateral charge mortgages. For Gord McCallum, who will be part of panel of industry leaders discussing the subject at the upcoming Mortgage Summit, the need for broker education on every facet of these complicated deals is key.
“They have their place, but proper disclosure is an important aspect in terms of consumer protection,” says McCallum, broker/president of First Foundations Residential Mortgages in Edmonton.
“What concerns me are the more recent developments where they’re being used across the board for all mortgage products as opposed to lines of credit.”
Collateral charges have been used for lines of credit before, but the ah-hah moment for brokers came when TD began registering all of their mortgages as collateral charge in 2010.
“Some of us saw that as contractual handcuffs at renewal for clients because it took away a lot of the client’s leverage in terms of being able to transfer that mortgage at renewal to another institution,” says McCallum. It also plays a role in renewal pricing, he says. “If you don’t have any leverage the lender will price things less competitively at renewal.”
Collateral charge mortgages also seriously hinder a client’s ability to get secondary financing.
“Clients can’t secure a second mortgage against their property because the collateral charge is registered to 100 per cent of the value,” says McCallum.
Many people don’t know the difference or aren’t being told about how collateral charge mortgages differ from traditional mortgages and what the implications might be, he says.
“It might be a case of finding out too little too late and then being in a position of having to sell your home.”
There are alternatives to collateral charge mortgages, say McCallum, but he would be worried if these products became more popular across the board. “It would be a challenging environment.”
“[Collateral charge mortgages] limit choice and as a broker I can’t be in favour of anything that limits choice for people. I have to value competition and choice,” says McCallum.
“I don’t mind lenders doing things differently, but I think people have to be properly educated about it.
“Is it truly for their benefit or is this seen as a retention tool and margin improvement for the lenders. If it truly benefits the client, brokers will choose it.”
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