Mixed Messages from TD Bank

Mixed Messages from TD Bank

The only man who sticks closer to you in adversity than a friend is a creditor.

~Author Unknown

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:

“The primary security on a collateral mortgage is a promissory note with a lien on the property for the total amount registered so you can register far more debt against the property than the property is worth. In the case of the TD Bank’s new approach, they are registering 125% of property value, even though that amount may not have been advanced to the borrower initially. (This is a very creative way to get around the government’s new guidelines designed to stop lenders from over-lending to clients on their mortgages.)”

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?

Written by Kim Petch

8 Responses to Mixed Messages from TD Bank

  1. Brian says:

    Disclosure: I do not know much about mortgages.

    I am trying to understand if the TD gets more security by going this way. For example, if a person “walks away” from his conventional mortgage then is he whole to the extent that the bank now has the house. The collateral mortgage, however, being a promissory note is not attached to the house but there is a lien against the house. So even if you walk away from the house the promissory note is still in existence until it is retired.

    Also, by having a registered note out there at 125% of property value you may have a note worth say $300,000 when your mortgage is only $100,000. Yes, you can borrow against this but it seems that it would kill your credit score as now there is access to large funds that other creditors cannot stop.

    Off course, as you stated the TD also has much more flexibility in rate setting etc.

    I am at a loss as to why anyone would want a registered note out against them.

    • 2 Cents says:

      Those are some really great questions. I’m not sure how to answer them either. Perhaps a couple of our readers out there who are more knowledgeable on this stuff could chime in! ;)

      What would happen in the case of default and how would this type of mortgage affect your credit rating?

  2. All I can say is, yikes! TD is highlighted, but they’re all the same. That’s why, if you can’t beat ‘em….join ‘em. Buy their stock.

    I will need to check out that Moneyville site. I’m “living the dream” right now, negotiating for our new mortgage for our new home; interesting stuff. The only reasons we decided to move now; rates are too good to be true. It won’t always be this way, which scares the crap outta me! :) We’re preparing for 5 or 6% rates in a few short years. That way, when things to do climb or spike, we’re not going to be broke.

  3. Rachel says:

    Just what everyone needs, an RLOC against their house. What could go wrong?

    Every time a broker tries to sell me or my family (my mom’s broker for her IRA does this all the time) I just tell them that there’s no such thing as a free lunch. They can tell me that their new product is magical and has no downside, but I’m not going to waste my time debunking every new nonsense product a bank comes up with. I might get crazy and buy an ETF every now and again, but that’s about as wild as I’m going to get, thanks.

    • 2 Cents says:

      The word “no” really can be a very powerful. We have lots of options. We don’t have to say “yes” to any of them if we don’t understand them or don’t think they’re right for us. Thanks for your comment! :)

  4. Dd says:

    I just wish our housing market would crash already. I want to buy a house–but I don’t want to pay 2x what it is actually worth :(

    I guess I should support TD then… they might force the crash that I am waiting for ;)

    • 2 Cents says:

      Well I sure wouldn’t wish a crash on anyone, but I do hope prices come down a bit you and others can find some great bargains! ;)

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