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In 2015, CBC Marketplace aired a show about collateral mortgages. In this show, they highlighted that TD Canada Trust only offers a collateral mortgage option. Also that they unfortunately do not proactively provide clients with enough information on the downside of these mortgages.
The episode went as far as to show hidden cameras in the TD Canada Trust branches speaking with staff about mortgages.
There can be many plus sides to these mortgages. However, it is important that clients are aware of the downsides as well. For example, a downside is having increased costs when trying to switch to another lender at renewal.
I have access to TD Canada Trust mortgages for clients, as well as dozens of other lenders. When exploring options with clients, I feel it is important to inform clients of the different pros and cons of each mortgage. The goal being to help clients choose the right mortgage for their needs.
The Toronto Star also reported on collateral mortgages stating that these mortgages can trap you. Also, that these mortgages constrain your freedom to move lenders.
As client’s needs, finances and goals change frequently, it is important to have a mortgage that offers flexibility. These mortgages can have possible challenges when changing lenders. Also, when looking to obtain a private mortgage or second mortgage.
The Toronto Star also wrote an article called, “Loyalty doesn’t pay when it comes to mortgage renewals.” With the Bank of Canada also confirming in a study that, those who switched lenders at renewal or use the services of a mortgage broker, do save more than those who renew with their bank, it is very important that a client does not get restricted when trying to switch lenders at renewal.
Pros and Cons of a Collateral Mortgage
If you are interested in a TD Canada Trust mortgage, I would love to review the pros and cons and how these mortgages compare to conventional mortgages.
In the last few years these mortgages have gained quite a bit of a negative reputation. This has been heightened by television shows such as CBC Marketplace. Also, newspapers such as the Toronto Star discussing the downsides to a collateral mortgage and the lenders offering them.
One major challenge is that lenders who are offering these products are not disclosing the downsides to the consumer.
Collateral mortgage pros
Collateral mortgages can come with more flexibility with regards to the products that can be secured against a property. Also flexibility is regards to the type of repayment. These products typically have a maximum borrowing limit. Within that limit there can be multiple lending products. Examples are a mortgage, lines of credit, credit cards and so on. When consolidating debt into this type of mortgage one can save on interest over personal interest rates. Also, with many of these products you are able to borrow back what you have paid off similar to that of a line of credit or credit card. Note, some banks, such as TD Canada Trust, register all their mortgages as collateral mortgages, even if it is just a standard mortgage like a five year fixed rate mortgage without all the multiple products within it or ability to borrow back what you have paid down.
During your term with the lender, for example during a five year fixed term, if you were to return to the lender to refinance, this type of mortgage will allow you to do so with savings on the legal cost towards refinancing.
Collateral mortgage cons
These mortgages however have been making negative news. This negative news is due to some of the challenges one can face with this type of mortgage. When a standard conventional mortgage is at renewal one can simply switch their mortgage to another lender with no cost or penalties. This is because the mortgage is transferable. These mortgages however is nontransferable. With that, it cannot be simply switched to another lender for a more competitive interest rate at renewal. In this situation to move lenders it would trigger a refinance. Unfortunately refinances come with appraisal and legal costs for the client. It can cost a client upwards of $1200-$1500 to move lenders at renewal.
Under the new lending guidelines one can only refinance up to 80% of the value of their property as well which could create challenges when wanting to switch lenders and not having enough equity in your property yet. In this case it may not be possible to switch lenders until your mortgage balance decreases further.
Furthermore, if you have multiple products within the collateral mortgage such as a credit card or line of credit, you would have to close them if switching lenders at renewal.
When the current lender has the upper hand in this situation. They may not be as proactive with low rate offers or matching other offers at renewal. This is because they know leaving them comes with extra work and costs. These mortgages can be a strong retention device for the lender.
Learn more: Mortgage Renewal
Other Collateral Mortgage Challenges to Consider
Another challenge with a collateral mortgage is that the lien registered against the property does not decline like a conventional mortgage. With a conventional mortgage, at the end of the amortization the lien will be at zero. The lien with the collateral mortgage typically will stay at it’s original amount for the life of the mortgage.
The negative news focus with collateral mortgages is mostly on how banks are not informing their clients of these downsides when offering the products. Also, that they are not informing clients that all of their mortgages are collateral mortgages when a client is applying.
How an Ottawa Mortgage Broker Can Help You
I offer both conventional and collateral mortgages. I look forward to reviewing your specific needs and finding the best mortgage for you. Also, I look forward to finding you the best mortgage rates in Ottawa.