There was a change in the Canadian mortgage industry last week. It was a quiet one, at least from a consumer standpoint, but I believe it will have a big impact down the road. The change, in a nutshell, is that TD Canada Trust has changed the way they register mortgages.
Up until October 18, TD registered their charges the same way other institutions did using a “conventional charge” for the amount of your mortgage. Registering your mortgage is something that you pay your real estate lawyer to do. Under TD’s new process, they are using what is called a collateral charge that is registered at up to 125% of the value of your home. The reason behind the change, according to TD, is to give homeowners easier, cheaper access to the equity built up in their homes.
It is very important to understand that this change does not mean borrowers can access 125% of the value of their homes. The same policies remain in effect, that limit all borrowers to a maximum of 95% LTV for a purchase and 90% LTV for a refinance. What it does mean, is as the value of a borrower’s home increases, if they refinance their mortgage, it will not have to be re-registered, avoiding legal fees. In the case of a refinance, clients will still have to adhere to the 90% maximum LTV policy and re-qualify for the desired amount. For example, somebody buying a house for $300,000 can borrow up to $285,000 (95% LTV) and the collateral charge would be registered for $375,000. If after 3 years, the property value has gone up to $400,000, the borrowers would be able to refinance their mortgage up to $360,000 (90% LTV) and not have to incur legal charges, provided the borrower qualifies.
The ONLY benefit I see for consumers is that they are able to avoid some legal fees, which would make just about anybody happy unless of course you’re a real estate lawyer. The drawback however, is far greater in my opinion and that is a lack of choice. What I mean by this, is there is some limitation at the time of that refinance or a renewal at the end of a term, if a client wants to switch to another lender. You see, other lenders will not accept a TD collateral charge on assignment (if you switch lenders at renewal or mid-term for a better rate), therefore switching lenders either at renewal or refinance will mean incurring legal fees. So, if you’ve got a TD collateral charge mortgage and want to refinance or have a renewal coming up, your choices are to stay with TD or pay legal fees to switch lenders.
The prohibitive aspect I can already see is the way in which it will be positioned. Upfront, I can hear clients being told that registering to 125% means “easier access to equity”. It doesn’t. The property still has to have increased in value and clients still have to qualify for the amount requested, no different than if your mortgage is not a collateral charge. The ONLY difference is that IF you refinance you avoid legal fees...but you also pay whatever rate TD is charging, no opportunity to shop for a better rate. At refinance or renewal, I can hear clients being warned about the fees. As it is, I hear it all the time when clients say their bank told them they would have to pay a “big fee” to do this or a “big fee” to do that without ever quantifying what the fee is or fully analyzing the options. I would fully expect that clients will be told they will incur a “big fee” to go to another lender. In reality, legal fees on average for a refinance are $600-$1000. I’ve even had a client whose lawyer charges $400 for a refinance. That’s the “big fee” you’ll be made to feel scared of. I’m not saying $400 or $600 or $1000 isn’t a lot of money. It is, but it may not be as much as the added interest you end up paying. The real downside for people who aren’t fully aware of their options and are successfully scared of the “big fee” is they will end up paying whatever rate TD is charging, without shopping the market. This is where analyzing your options comes into play. If TD’s 5-year fixed rate is 3.89% but you can get 3.59% at a different lender, it may be worth paying the legal fees to switch lenders. It may not, but at least doing the analysis will help you make an informed decision, rather than being scared of the “big fee” and paying whatever rate is being charged. Either do it yourself or have a professional do it for you, preferably someone without bias as to which lender your mortgage is with.
As always, my opinion is that education is paramount. Understand the conditions of your mortgage and what it is you’re signing. If you don’t understand something, ask for clarification. If you still don’t understand, ask again or ask somebody else. If you feel you’re not getting straight answers, you’re not talking to the right person. And for the love of God, don’t listen to things like “big fees” or “lots of interest” without getting it quantified.
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2 comments:
A fantastic post. It's a brilliant move for TD, not so much for their customers. Thanks for making the point so clearly as to why people really need to look at all the details before locking in with the big banks.
Thanks Elle for reading and commenting!
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