How to Make Your Mortgage Tax-deductible (Part Two)
October 13, 2010Waiving Your Financing Condition
October 27, 2010In late October 2010, Toronto Dominion (TD) Bank very quietly tweaked the way it registers its mortgage loans.
While this might have at first seemed like a small change (and that’s certainly the way the bank positioned it at the time), it has had a significant impact on the overall borrowing costs of many of TD’s customers since then.
Here is what changed: TD now registers all of its new mortgages as collateral charges [Editor’s note: several of the other Big Six banks subsequently copied TD’s move]. This was an unusual move because while collateral charges are common for mortgages that include home-equity lines-of-credit (HELOCs), they have not been used for 
mortgage-only loans.
In effect, TD’s move to universal collateral charges has now made it more expensive for borrowers to move to a different lender at renewal under the guise of making it cheaper to borrow more money from them in the future.
This begs the question: If the threat of switching lenders is your best way to negotiate a fair deal at renewal, what happens to your leverage when the bank neutralizes that threat by making it more expensive to leave than to stay?
First, a little background. There are two ways a lender registers a loan when your home is used as the security, as a standard charge or as a collateral charge:
- Standard charges are registered at the Land Title or Land Registry Office (depending on the province), and can be registered, transferred or discharged. That means that if you want to switch, or transfer, your mortgage to another lender at renewal, you can do so for minimal cost (approx. $30), which most lenders will cover.
- Collateral charges are registered under the Personal Property Security Act (PPSA) and can only be registered or discharged (not transferred). If you have a collateral mortgage and want to change lenders, you need to re-register a new mortgage on your property’s title, and this will cost about $800 plus tax. As such, switching your fixed-rate mortgage from TD to a different lender at renewal will cost you a little under $1000.
But that’s just the tip of the iceberg.
Borrowers are also being encouraged to allow TD to register a collateral charge for up to 125% of the current value of their home when they take out a mortgage with the Bank. The pitch is that doing this makes it cheaper to borrow more money from TD in the future (because the charge does not have to be re-registered). This way, even if your house goes up in value, you can tap into that extra equity without having to consult anyone other than your TD Bank rep (assuming you qualify).
Sound convenient?
Maybe, but this convenience has a downside.
For starters, every lender requires you to buy title insurance that covers the amount of the charge registered on title. As that charge increases, so too does the cost of your title insurance.
Worse still, by giving the bank the legal right to the first 125% of your home’s current value, any equity that you have built up in your home is then worthless as collateral to any other lender.
Here is another example of where TD’s latest change could come back to bite you.
Let’s say you needed to borrow 75% of the current value of your property and after hearing TD’s pitch you decided to let them register a collateral charge of 125%. Assume then that two years later with your wife on maternity leave and a new baby to support, you are having trouble making ends meet.
You contact TD to apply for an increase in your credit line, but with your credit score impacted by some recent missed payments, they decline your request. You contact a mortgage broker who has numerous alternatives for you to consider, but because TD has locked up 125% of your home’s value, your only option is to break your current mortgage and re-borrow the entire amount somewhere else.
In addition to having to pay a potentially huge break penalty you will also now incur legal and discharge fees to register a new mortgage, and of course, with a temporarily low credit score you won’t be able to qualify for the best rates anymore.
Had you financed your original fixed-rate mortgage with almost any other lender, they would have registered your loan as a 75% mortgage charge instead, and you could have easily added secondary financing elsewhere while keeping your existing mortgage and rate in place (with no penalty or discharge costs to worry about). In this example, the difference in overall cost is easily in the thousands of dollars, and that’s without assuming that all of this could be happening in a rising interest-rate environment.
If you’re surprised that TD would design a product this way, don’t be. It’s not easy making $1 billion+ in net income every quarter and since mortgages account for about one-third of the Big Six banks’ retail profits, this is a cash cow that has to be milked.
Today about two-thirds of Canadians still walk into their local bank branch for mortgage advice and most of them sign whatever is put in front of them. Why wouldn’t TD take advantage of this by registering your mortgage in a way that makes it cost prohibitive to ever get off of their comfy green chair? Especially when borrowers won’t even realize what they’ve traded off until years later?
Squeezing a little more profit out of mortgage customers isn’t new. It’s tried all the time, for example, by offering renewing mortgage customers posted rates (one-third of whom actually sign back the offer). I’m not surprised TD is trying to maximize its profits, but I am surprised when customers place their blind trust in the hands of an organization that has proven to be world-class at achieving that end (here is a CBC Marketplace segment on the topic).
One final thought: In retail banking, three is the magic number.
The odds say that if a bank can sell you three products, you will be theirs for life, probably because the cost and hassle of switching become too prohibitive. Since most bank mortgages are based on fixed rates (which are, to no one’s surprise, more profitable), registering them as collateral mortgages makes it easier, and cheaper, to sell customers other products like lines of credit and secured credit cards (to get to the magic number three).
The question for you to consider is, does being viewed as “a customer for life” help or hurt your negotiating leverage, especially when the bank knows how much it will cost you to leave?
If you want my advice, consider TD’s stock, but think twice about its fixed-rate mortgages.
Follow-up note: while TD was the first major bank to adopt this policy, several of the other major banks have since followed suit. It’s too bad that these lenders have decided to adopt a policy of using collateral mortgage charges across the board when it seems entirely inappropriate for many of their borrowers. I can only assume that they did this to improve profitability, which may well be the case until enough customers start voting with their feet! As always, forewarned is forearmed.
24 Comments
Hey David
I am glad that you picked up this and blogged about it. I noticed it in the paper last week. What a way to handcuff clients to the bank I hope other banks don’t follow suit.
Here’s the ultimate irony Chris. At the same time that TD is pushing borrowers to register 125% of their home’s current value in order to make future borrowing from TD cheaper and easier, they are quoted in today’s Globe & Mail expressing concern to the that Canadian personal debt levels are “excessive relative to what economic models would predict as appropriate”. Do they really think nobody notices the contradiction?
Here is the full article FYI: http://www.theglobeandmail.com/report-on-business/economy/excessive-personal-debt-a-concern/article1764981/
So true David… and yet despite this, Canadians love their banks and have blind trust in their bankers that they are serving their best interests. As a mortgage planner you understand the need to take a holistic view of mortgage financing to help your clients. Thanks for sharing the link…
Nothing new. Credit Unions in BC have been doing this for a long time. Don’t know about Ontario system, but collateral mortgages on real estate is a registrable charge at Land Title Office here in BC. It is not a chattel mortgage.
Hi Dave,
I”m an independent Mortgage Broker.
A client sent me the link to your blogs. You makes the “TD Collateral Mortgage” sound a very very bad thing.
To be fair, it benefits a lot of people from saving legal fees when refinancing with TD.
What incentive does TD have to give the best rates when you are renewing? Plenty! it cost them significantly more to get a new customer than retain one. they can offer better rates on retention.
the bottom line is: there are pros and cons about this. some will benefit from it, and some will be held back by it. People should really assess their own needs.
Liang
I just found out today that National Bank is also doing this, unbeknownst to us. Thankfully, we are saving enough by switching lenders to cover the fees but what an aggravation! and we were never told.
This is a common product among the big 5 banks. Any bank you go to either have the option of register the mortgage for a higher charge, or in some other cases, registering a mortgage/line of credit product together (for up to 100%) that is not transferrable either. I find it interesting that you target one bank instead of doing more research. The bottom line is, the customer has choices and they can discuss with their financial representative and their lawyer when choosing their lender for their mortgage.
Hi Jay,
There were several reasons why I singled out TD in this post:
1. While collateral charges are common among the Big Five Banks, they are typically used in cases where borrowers opt for a mortgage that includes a home-equity line-of-credit (HELOC). TD was the first lender in Canada to register all of its fixed-rate mortgages as collateral charges, even in cases where a HELOC was not included as part of their loan.
2. TD made no public announcement of any consequence to inform borrowers of this material change, and the Bank was deservedly criticized for not adequately educating its customers about the implications of this new policy (this post was part of that barrage). In spite of this, the Bank did not appear to make any real effort to improve its communication to customers at the ground level, to the point where the federal government is now introducing special legislation that is designed to force it to do so. In short, I felt compelled to fairly and properly explain the impact of collateral charges to Canadians when TD would not.
3. When TD promoted the option to register a mortgage charge for up to 125% of the value of a borrower’s property, the Bank pitched this feature as a way to make future borrowing easier and more flexible. Once again, TD made no meaningful effort to inform borrowers that engaging in this practice would effectively eliminate all other borrowing alternatives for them for the life of their mortgage contract (based on feedback from my clients and on TD’s own communications). I felt that this was a critical detail that was not being adequately disclosed to borrowers, and that’s why I wrote about it in this post. I would add that I have since encountered more than a few TD clients who were shocked and dismayed to find their hands completely tied when TD would not approve their request for additional mortgage financing.
You write that “the customer has choices and they can discuss with their financial representative and their lawyer when choosing their lender for their mortgage” and my post was written to inform that very discussion.
Lastly Jay, I note that you posted your comment from an IP address at TD bank. If you are an employee of the bank I would encourage you to raise these issues with senior management in an effort to better inform your customers.
Thanks for your comment.
Dave
Great post and discussion Dave! I’ve been doing extensive research on all the HELOC products out there so I can make an informed decision. They all seem to be collateral charges which if I understand things correctly, present these downsides:
A. Removes secondary financing ability if the charge % is too high.
B. Gives bank too much power by allowing them to secure all other current and future credit products the customer has with them under the one collateral charge. So customer has to pay out all the products (credit card, auto loan, LOC, mortgage) in order to switch lenders. Also if they miss a payment on a credit product the bank can foreclose on house or apply your mortgage payment to cover it.
C. More costly to switch lenders – approx $1000 in fees as you stated.
Here are my questions:
1. Are my understanding of the downsides correct? Did I miss any?
2. What % of collateral charge is ok to still keep the door open for secondary financing? 80% LTV?
3. About problem “B”, BC lawyer Kenneth Pazder wrote on another blog that he instructs his clients to get a letter from the bank saying “notwithstanding the terms of the mortgage, unless otherwise agreed by the borrower and the bank, no other indebtedness (save the mortgage loan and/or line of credit component as the case may be) shall be secured by the mortgage charge.” Will banks agree to sign this and would this solve problem B?
4. Another suggested option to solve problem B is to not have any other credit products with the bank holding the collateral charge mortgage. Do you agree?
5. Which of the banks/lenders (if any) are the better option(s) for reducing the downsides of a collateral charge?
Thanks!
Robert
(Ontario)
Hi Robert,
Thanks for your note. In answer to your questions:
1. I think you have captured the key points.
2. I think that in most cases, the collateral charge should only be registered for the amount of the funds advanced when the deal closes.
3. In my experience, not a snowball’s chance in Hades!
4. Yes.
5. If you want a fixed-rate mortgage only, any non-bank lender will still register your loan as a mortgage charge.
Best regards,
Dave
TD put a collateral charge of almost 200% of the borrowed funds against our home, totally locking up the equity. We agreed to this for the sole purpose of getting a large credit line.
Now TD is telling me they can’t put a credit line on the same collateral charge as our mortgage! WHAT THE HECK!?!?! This is precisely why we agreed to the collateral charge in the first place!
Why on earth would they register that charge and not be willing to lend more funds on it? I’m bloody fuming mad at them.
Hi Dave,
I am just about to buy our first house and was confused by TD’s collateral charge options on the mortgage documentation -your blog gave me exactly the information I needed (sigh).
Well written and incredibly informative – will advise my fiancee not to opt for the 125% :D.
Cheers,
Dan
Thanks for your note Dan. Glad you found the post useful.
Best,
Dave
Hi Dave,
Very informative post. Something which people usually will not know, especially First Time Homebuyers like me.
Question – Does this Collateral Charge option apply for Variable Rate mortgages too? Will the banks let us choose Standard Charge option or they have made it mandatory to choose Collateral Charge option?
Thanks,
Sagar
Hi Sagar,
Some of the Big Six Banks will require that your variable-rate mortgage be registered as a collateral charge but others will offer you the choice (although you may have to ask).
The key, as always, is to shop around (or let a broker do that for you)!
Best,
Dave
Thank you Dave for the excellent information
Just went through this ordeal myself getting a mortgage and HELOC set up at TD bank. Shockingly the mortgage specialist processing my application could not even tell me the difference between a standard charge vs collateral charge. When pressed she suggested that I contact a lawyer for the information instead. Her main objective was to maximize the amount of the collateral charge that I would agree to. When I specifically asked about any disadvantages of the collateral charge, she stated that there are none and that it was to my advantage should I decide to borrow more in the future (as you stated in your article as well).
Also love how you called out Jay above for posting from a TD bank IP address.
Cheers,
Amanda
Thanks for you note Amanda – and glad that you found the post useful.
Best regards,
Dave
I recently purchased a home for $640k. I had $350k and needed a mortgage for the balance.
I had no idea until I went to the lawyer on signing day that TD had registered the mortgage for $640k. They had used all of my cash and inferred that they had mortgaged the property in totality.
The lawyer believed I had fully mortgaged the property.
I told him that was outrageous as I had more than half the value as collateral. He then told me that he worked for me and the bank and if there was a conflict he would be dealing with the bank so I would have to find another lawyer.
I have two words…being nice of course….caveat emptor.
TD shame on you!
David nicely written, very informative and I will keep you in mind for my next mortgage switch
Came across this site (Mar 7,2020) while doing my research on my current refinance with TD. Still very useful. Thank you Dave
Hi
First of all thank you for helping the public making better Mortgage decisions.
My question is as follows : I have a collateral mortgage with TD that is around 125% the value of my house . I also have credit card debt and a line of credit with them. It says in the mortgage contract that i signed ” The Mortgage granted to us may not secure more than one agreement for a loan or a line of credit at a time “. So lets say i default on my unsecured TD credit card or line of credit can TD take it from my house ?
Hi Salamon,
I believe that TD would be able to take your house if you don’t pay your line-of-credit because of another clause in their mortgage contact call cross-collateralization.
You can learn more about it in this post: https://www.integratedmortgageplanners.com/buyer-beware/the-americanization-of-canadian-credit/
Best,
Dave
Is collateral mortgage for a fixed term (5 year, 3 year etc.) or for the entire amortization period. Can this be changed to regular mortgage ?
Hi Jagvijay,
Once a mortgage is registered by the lender they won’t change it.
You can change the way the mortgage is registered if you switch to a different lender, but not for as long as you stay with the original lender.
Best,
Dave