The great debate: collateral charge mortgages

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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.”

Click here to learn more and to register for The Mortgage Summit.

  • Farhaneh Haque, Director Mortgage Advice- TD Canad on 2012-05-05 3:02:24 AM

    I couldn’t agree more, as industry professionals it is incumbent upon us to explain the details of any product or feature so that the customer can fully understand how this applies to or suits their situation. Notably when lenders hold a collateral charge as a security, the customer does have to discharge their mortgage if they wish to move to another lender, however for the vast majority of customers who wish to renew or refinance with their current lender, a collateral charge can save them money & time on their future borrowing needs.
    With a collateral charge the customer has the choice to register up to 125% of the property value, this is optional and up to their discretion. If they only register for the amount they actually borrowed, there is no impact to their access to secondary financing elsewhere.
    This topic receives much attention; i host TD Helps with Home Ownership community where homeowners/buyers write in for clarification on this as well.

  • AB Broker on 2012-05-05 3:34:48 AM

    Farhaneh Haque, with all do respect, lets be honest here. You will do what's in your employer's best interest over the consumers the majority of the time. If you don't meet or exceed TD's mandate, they will pull you aside and school you. Do you advise the client that a collateral charge at 125% can restrict them in the future? Do you advise them that there are other products in the marketplace that might be better suited for them and with less restrictions? One size doesn't fit all! It's like asking McDonalds who has the best hamburger in town. You wouldn't expect an honest answer, would you?

    Don't get me wrong, TD has their place in the market, but they also have shareholders to answer to and those shareholders demand profits. I've yet to see a shareholder put transparency before profits.

  • Ontario Broker on 2012-05-05 6:01:22 AM

    Farhaneh, as the Director of Mortgage Advice would you please explain to us all why TD has collateral mortgagors sign promissory notes at prime plus 8 to 10 %? The whole mortgage brokerage industry awaits your answer.

  • Farhaneh Haque on 2012-05-05 10:32:50 AM

    Hello there, great question. I was recently asked this from a cusotmer on our TD Helps with Home Ownership community. My detailed explanation can be found at www.tdcanadatrust.com/homeownership

  • MortgageMan on 2012-05-05 10:41:29 AM

    Its ridiculous TD can rip clients off like this. Many of my clients are friends and family. I could NEVER advise them to get ripped off like this by my bank. Its unethical, as far as I'm concerned. I could not work for TD if they want me to advise clients and expect me to sell this collateral mortgagde. Its like bei.g a car salezman, and knowingly selling a client the lemon. I would rather work for Mercedes, and know that I am giving my client value and a great product. Farraneh, good luck trying to explain the 10% promissory note to a client who been EDUCATED by a broker

  • MortgageMan on 2012-05-05 10:44:46 AM

    I have used TD in the past on occasion, but with this collateral mortgage, they are no longer a decent option for my clients. Its a shame ING also went this way. Hope more lenders don't do the same.

  • MortgageMan on 2012-05-05 10:52:39 AM

    Its ridiculous TD can rip clients off like this. Many of my clients are friends and family. I could NEVER advise them to get ripped off like this by my bank. Its unethical, as far as I'm concerned. I could not work for TD if they want me to advise clients and expect me to sell this collateral mortgage. It's like being a car salesman and knowingly selling a client the lemon. I would rather work for Mercedes, and know that I am giving my client value and a great product. Farraneh, good luck trying to explain the 10% promissory note to a client who been EDUCATED by a broker

  • Victoria BC Broker on 2012-05-12 2:58:53 AM

    Farhaneh, Could you please explain why TD did not disclose the implementation and use of collateral charges to secure first mortgage loans in late 2006, rather waiting until October 2010 to advise the broker community and the public of this practice?

  • MortgageMan on 2012-05-12 4:44:08 AM

    Hi Victoria. Great question!! I didn't realize that either.

    TD probably decided to announce it once the CIBC class action suit re prepayment penalties got serious!! That's probably when TD decided they should try to cover their butts, and disclose their collateral charge. Too little, too late.

    Once again, Canadians get cheated by the Big Banks. The devil is in the details, and the Banks love to hide these little devils, like collateral charges and prepayment penalties, in the fine print!! It's amazing that very rarely do the real estate lawyers catch it either. Lawyers charge their clients $1000 per transaction, and it seems that many of them simply rubber stamp these deals. Many aren't aware of changes the banks make to their mortgage docs and all the fine print.

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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