What is a collateral mortgage?
Recently TD bank announced that effective October 18th all new mortgages, would be registered as a collateral charge. This practice has been common with some institutions including some Credit Union.
A collateral mortgage is normally registered for floating or revolving debt such as a secured line of credit. What does it mean for consumers? It means that it will allow clients to come back at a later date and refinance their mortgages without incurring legal fees or other charges. Sounds good? Maybe, but don’t get too excited, there are a few things you need to know.
Collateral mortgages are not portable, meaning you cannot transfer to another institution without rewriting the mortgage and incurring legal and appraisal costs. In addition consumers will lose some leverage to negotiate their rate when their mortgage matures. If consumers want to increase their mortgage in the future, they will need to reapply for approval. There are chances some consumers would not qualify in the future, not because their situation has changes but because the rules have and rules changes all of the time. You would now have to seek out an entirely new 1st mortgage as no other lender would register a 2nd mortgage in behind a collateral first mortgage (at least none that I am aware of) that could mean penalties, definitely legal fees and other costs. Keep in mind that you do not have the option to choose how to register your mortgage; TD has decided this for you.
Why is TD doing this? The current mortgage business is extremely competitive and this approach by TD is clearly a strategy to improve retention by limiting your future options. This is a strategy used very successfully by other financial institutions such as RBC. My advice is if you are in discussion with TD, before signing; make sure that you understand all of the terms and option. Better yet, make sure you discuss your situation with an independent mortgage professional. There may be other options available to you.
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