The only man who sticks closer to you in adversity than a friend is a creditor.
Update: This article was included in the Carnival of Personal Finance #281 posted at Consumerism Commentary. Thanks!
Last week Gail Vaz-Oxlade wrote a really interesting article about The New TD Collateral Mortgage. I was very surprised that I had not heard more about this given that it seems like a pretty big deal to me. As of October 18, 2010, TD will register all new mortgages as collateral mortgages rather than conventional mortgages.
If you’re asking yourself what in the world a collateral mortgage is, you’re not alone. I didn’t know either. Gail goes on to explain it very well in the article. The mortgages most of us have in Canada are conventional mortgages. We have a set amount of principal that we’re borrowing, with a fixed amortization and a term after which we can renew the mortgage. We can easily shop around for a better interest rate from another bank or mortgage company once the term is up.
The Mouse Trap Mortgage
According to Gail, a number of brokers have taken to calling these collateral mortgages “mouse traps.” A collateral mortgage is more like a secured line of credit, like a home equity loan. Here’s what Gail had to say:
It sounds a bit confusing, but basically, the bank can register the collateral mortgage for an amount that’s greater than the amount they actually lend to you, giving you the ability to easily borrow more if you so choose. It works more like a revolving line of credit. They can also easily change the interest rate on you (by a lot) if you miss a payment. That doesn’t happen with a conventional mortgage.
When it comes time to renew your mortgage, you may be surprised to find out that “most chartered banks will not accept “transfers” of collateral mortgages from other chartered banks, so you have to pay a whack more fees to register a new conventional or collateral mortgage if you decide to move to a new lender.” TD may offer some pretty good teaser rates to get you into these things, but it would be a good idea to look at how the heck you’re going to get out of it if you sign those papers.
Basically, these collateral mortgages will allow those with a tendency to overuse debt to get in way over their heads. Isn’t this exactly the same problem that our neighbours to the south are dealing with right now? U.S. consumers are in a massive deleveraging mode because they borrowed too much money against their homes.
Meanwhile, our Canadian banks are being lauded worldwide as the gold standard in responsible lending and prudent regulation. Now seems like a very peculiar time to allow all of that to unravel. Will the other banks follow TD’s lead and pull that string? If so, you might as well kiss that “Our Banks Rock” sweater goodbye. Cue Undone (The Sweater Song) by Weezer.
New Study by Mouse Trap Manufacturer Finds Surplus of Mice & Cheese
Two days after TD’s new mortgages went into effect, I read an article on Moneyville (a great new personal finance site courtesy of the Toronto Star) that went over a new TD Economics report. Guess what that report said? It seems that “Canadian debt loads have become excessive as consumers get more accustomed to easy borrowing.” The Moneyville headline put it this way: Many Households on the Brink, TD Bank Says.
I can see it all now . . . I’m your banker and I’m here to help. Too much debt you say? How about a loan? . . . Am I the only one who finds this farcical? These are exactly the same practices that trashed the U.S. and global economy. It’s like your neighbour just burned down his house by fooling around with his gas lines and you suddenly decide now’s the time for a do-it-yourself furnace installation.
If you have a mortgage, do yourself a favour and go read Gail’s article. Forewarned is forearmed. Next, head on over to Moneyville. TD’s got some great info for you on how “debt will continue to rise more rapidly than income.”
Read that last sentence again. Then start looking at how much debt is lurking on the liability side of your balance sheet. Do a little math to figure out the real cost of that debt, get your own personal debt clock ticking, and start making a plan to do whatever it takes to get rid of it. That way, when the bank munificently offers to help you out, you can tell them that you’re not interested in their cheese or the potentially fatal snap that comes with it.
What do you think of these collateral mortgages, especially in an environment where debt is an increasing problem?