TD Takes Heat for its Collateral Mortgages

Thank you Canadian Mortgage Trends for this great article!

I'm hoping more and more people start to realize how important it is to speak to a professional who is NOT tied to one lending institution. This is not just with a mortgage, it's with investments, insurance and so forth.

There's a reason why we're here...to help educate you and to help you make the right decisions...with only you and your goals in mind. No one elses, ie shareholders, big CEO's etc...

Collateral charge mortgages got more bad press on Friday after CBC’s Marketplace ran this report.
The gist of it is that collateral mortgages "effectively trap you at the bank," says the CBC (which is not entirely true…more on that below).
TD Canada Trust, which sells only collateral charge mortgages, was caught in CBC’s crosshairs. An undercover reporter went into a TD branch with a hidden camera, asking the mortgage rep what made TD mortgages different than those at other banks.
After being questioned in four different ways, the TD rep finally disclosed that TD’s mortgage was a collateral charge, saying:

"This could be considered a con for clients who want flexibility to have the choice of transferring out (to another lender).”

CBC approached TD corporate for comment, but TD apparently wouldn’t respond about its collateral mortgages on camera.
Collateral charges are designed so that you don’t need to pay refinance fees if you add more money to your mortgage. But they’re also criticized because, in most cases, they force you to pay legal/registration fees to switch to another lender (due to the way they’re registered). In turn, that roadblock helps the lender retain more customers.
Even TD itself does not accept collateral mortgages from other lenders. In its mortgage guidelines (which we obtained freely off the Internet) TD says: “Collateral mortgages (e.g. Manulife One accounts and Scotia Total Equity Plan accounts) are secured by collateral mortgages and cannot be transferred [to TD].”
It should be noted, however, that a handful of lenders currently pay legal fees to attract business from people with collateral mortgages. ICICI Bank (for status brokers) and Royal Bank (according to a rep we spoke with) are two such lenders.
One of the bones CBC picked with TD was that its collateral registration is not disclosed to clients until the customer is signing in the lawyer’s office, at which point it's too late to switch lenders. CBC might have been referring to old documentation, however, because TD’s approvals now clearly disclose that their mortgages are a “COLLATERAL CHARGE.” (Whether the borrower reads this disclosure and understands it, and whether the TD rep or broker explains what it means, are separate issues.)
Collateral mortgages are useful and can save you roughly $500 to $800 in legal costs if you:

a) have a high likelihood of refinancing before maturity, and
b) the lender approves you for those additional funds (a big caveat).

But they also have potential drawbacks, over and above the additional switching cost:

• Since they’re often registered for more than the mortgage amount, collateral charges can sometimes prevent you from obtaining a second mortgage or a secured line of credit elsewhere (unless you pay any penalties and fees required to leave the collateral mortgage lender, or unless that first lender reduces the mortgage amount it has registered and permits secondary financing).
• Title insurance premiums can sometimes be higher for a collateral mortgage than for a regular mortgage.
• In some cases, defaulting on another debt owed to a collateral mortgage lender can put your house at risk. That’s because that lender can theoretically seize your home equity if you don’t pay that other debt. (This is called “offsetting” in legal parlance.)

A number of other lenders sell collateral charge mortgages besides TD. They do so even if the borrower wants just a regular mortgage with no line of credit. Such lenders include ING Direct, National Bank and various credit unions, for example. And most of these lenders don’t give you an option to refuse this type of registration.
All in all, collateral mortgages are right for some but clearly unsuitable for many. A few years ago, TD said that “20 times” as many customers refinanced with them versus leaving for another lender. But that figure has to be less now, given that government rules prohibit refinances above 80% loan-to-value, and given that home price appreciation isn't what it used to be.
To that extent, the net benefit of collateral mortgages is questionable for most of today's borrowers.

Source: http://www.canadianmortgagetrends.com

Painful Breakage Costs

Great article from Canadian Mortgage Trends. The big 6 have been proven to be very expensive to get out of their mortgage.

Personal Finance Columnist Rob Carrick deserves a tip of the hat for bringing TD’s inordinate mortgage breakage fees to light. More here. Yet, while Carrick's article focuses on TD's excessive fees, TD is far from the only lender that exacts extra pounds of flesh for breaking a mortgage contract.
Others lenders do things like:

• Charge 3-month interest penalties based on posted rates instead of your actual rate like most lenders (See: 3-Month Penalties Aren’t Always Clearcut)
• Charge $300-$1,000 “reinvestment fees” on top of your penalty and discharge fees
• Charge interest rate differential based on posted rates (common among the Big 6 banks) instead of cheaper discount rates 
• Impose IRD charges based on bond yields (which can sometimes be more expensive than even posted rate penalties)
• Apply IRD penalties to variable-rate mortgages
• Charge 6-12 month interest penalties, instead of three months
• Prevent early termination altogether.

Before choosing your next mortgage, ask your lender or broker for a written list of early termination charges, as well as the lender’s penalty formula.
The fairest lenders impose only a discounted penalty and a simple discharge fee. If you’re going to deal with a lender that charges you through the nose to break early, you better be confident that you won’t need to. And, your interest rate better be well below all other comparable lenders. (This assumes you’re well qualified because your options may be limited if you’re not.)
When accepting harsher termination charges in exchange for a low rate, remember that it’s not always possible to know where life will lead you 3-4 years down the road (that’s when most folks break a 5-year mortgage).
People terminate their mortgage before maturity for numerous reasons, including:

• equity take outs (People use these for debt consolidation, buying other properties, investing, educational borrowing, renovations, business start-up, etc. Many lenders let you tack on extra money to your mortgage without a penalty. Some don't. Others charge no penalty but bend you over on the interest rate.)
• job change
• new marriage (e.g., consolidating residences)
• separation/divorce
• upsizing or downsizing (if a port isn’t advisable)
• rate improvement
• amortization extension
• adding a readvanceable line of credit
• health issues
• unemployment
• relocation.

Source http://www.canadianmortgagetrends.com