David Larock in Mortgages and Finance
This week, Toronto Dominion (TD) Bank very quietly tweaked the way it registers its mortgage loans. While this may at first seem like a small change (that’s certainly the way TD has positioned it), the impact for many TD customers will prove significant over time. Basically, the Bank has decided to register all of its mortgages as collateral charges. While this is common for lines of credit and variable-rate mortgages, it is unusual for fixed-rate loans. In effect, TD is making it cheaper for you to borrow more money from them in the future, while at the same time making it more expensive and more difficult for you to move to different lender. This begs the question: once TD has its customers locked-up, what incentive does it have to offer aggressive pricing? Put another way, 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 far 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 mortgage charge or as a collateral charge. Mortgage charges, which are regi stered at the Land Title or Land Registry Office (depending on the province), 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 (aprox. $30), which the lender will usually 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 and this will cost about $800 + tax. So in future, 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 register 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 ch
Here’s a hypothetical example of where this new feature 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% on the current value of your property. 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 planner who has numerous alternatives for you to con
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 Five 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), or by pushing mortgage life insurance, which is the worst form of life insurance ever invented. I’m not surprised that TD is try
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 their fixed-rate mortgages.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog (integratedmortgageplanners.com/blog). Email Dave
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