A year ago, TD Canada changed the way it registered its mortgages. All new TD mortgages [since October 18, 2010] are now registered as collateral charges bringing about some noteworthy changes and a bit of controversy.
What are Collateral Charge Mortgages?
A collateral charge mortgage is different than a traditional mortgage. A lender can register a loan (when the home is used as the security) as either a standard mortgage charge or as a collateral charge.
A traditional mortgage is registered, transferred or discharged through the provincial Land Title/Registry Office. The important feature to note is that the ability to transfer your mortgage to another lender is permissible.
Collateral charges are not registered with a Land Title Office, but under the Personal Property Security Act (PPSA). Once registered under the PPSA, a collateral charge can only be registered or discharged, a transfer of any type is not possible.
Furthermore, it is a loan that allows a borrower to tap into their home equity if the property rises in value. Mortgages registered as collateral charges are more common for lines of credit such as HELOCs. It is also unusual that a major Canadian bank such as TD would choose to register all their mortgages as such.
How does this impact you?
First let’s get into the advantages of collateral charge mortgages. The primary benefit to you is that accessing your home equity becomes much, much easier. A lawyer’s presence is no longer necessary. TD registers your mortgage for approximately 125% of the value at closing meaning if your house increases in value, you can access that equity. They can do this because the charge does not have to be re-registered in the event that you need to borrow. This allows you to take out equity free of charge assuming the value of their homes rises.
If the value of your home is $400,000 and after a year increases to $500,000 – qualified borrowers will be able to withdraw that new equity without refinancing.
The issue with collateral charge mortgages comes during renewal. If you’re a savvy mortgage owner, as renewal approaches, you would’ve already been comparing mortgage rates in Canada to find who’s offering the best rates. Here’s where the problem lies. In order to change lenders, your mortgage would have to re-register as a new mortgage. Also, this requires a lawyer’s presence. Thus making it more expensive for you to switch lenders.
Are collateral mortgage good or bad?
The real issue with TD automatically registering new mortgages as collateral charges is the omission of choice. As a borrower, you are forced to accept TD’s new mortgage practice.
Whether it is beneficial to you or not depends on what you plan to do in the future. If you are a loyal TD customer and know with great certainty that your mortgage will stay with them, then a TD collateral charge mortgage may come in handy, especially if you need to take out home equity in the future. However, if what matters most to you at renewal is finding the best mortgage rate in Canada, then you’d want to steer clear of collateral charge mortgages. There are too many factors working against you, such as the need for your home to increase in value to be able to truly reap the benefits of withdrawing that equity
Another serious issue is that when borrowers are faced with a penalty for leaving TD at renewal, TD does not have to offer a competitive mortgage rate to keep you. With collateral charge mortgages, switching becomes more difficult at renewal time because of the need to pay legal fees.
Before making any decision, talk to a mortgage professional to ensure your commitment to a lender is the right one for you.