The Details: What you need to know about “discount mortgages.”
Grandma always said, “The price is the price, but the details are the details!”
There are discounted and restricted mortgage rates out there but they do not share the details of their disadvantages up front with you.
- Restricted or Limited Products / Bait & Switch
People will not even sign a 3 year cell- phone contact any more but they will try to save $15 a month on a restricted mortgage; which could cost them $30,000 as a payout penalty – BUYER BEWARE is what the regulators say.
Brokers often advertise these products to get you to call them and then they switch you into a “regular product” if you are lucky – or you get a “restricted product” that you probably do not want if you know all the details.
Discount mortgages called “limited” or “restricted” and often have:
- No rate holds
- Only monthly payments
- Only 1 statement a year
- No on-line administration = call centre only
- Only 5/5 extra repayment option – most broker lenders are 15/15 + 2x or 20/20
- The 1st number is the % of the original mortgage amount you can repay every year without penalty
- The 2nd number is the increase in monthly payment in % you can do without penalty.
- The 2x = double the payment!
- And they use the bank payout penalty calculations – as below in the Dirty Trick – AND in addition to that penalty, a 3% fee of the entire mortgage balance added to the penalty!
- This could easily end up at $30,000.
The other main “Details” that are not often disclosed are:
2.Collateral Charge
To keep you from leaving the bank for a lower rate when you renew later, the banks register your mortgage as a collateral charge – which is the same as an “I owe you” / IOU for the home. Other banks will not take another banks IOU for a mortgage; which means:
- A lawyer will have to re-register your mortgage at land titles; $1000.
- An appraisal is needed as the registration is usually for more than the value of the home; $450
- http://blog.markherman.ca/?s=collateral
- This means on renewal you will not get the best rates because it will cost you about $1500 – $2500 to move banks – even after your term is over.
3. The “Dirty Trick” of how the banks calculate your payout penalty
- If you have to move or break your mortgage the payout calculation is usually way lower at a broker-only bank than any of the big banks. The big banks all calcualte the penatly the same way now – to their advantage, not yours.
- http://blog.markherman.ca/2015/08/26/payout-penalties-how-the-big-5-banks-get-you/
To avoid these products, or to disucss what your personal situation may be, call us any time at 403-681-4376.
Mark Herman, Top Calgary, Alberta, mortgage broker for renewals, first time home buyers and home purchases.
More bad news about collateral loans
More collateral info in the press. As we have been saying for more than a year now; collateral loans can trap you later. Leverage the expertise of a person who has dealt with mortgages all day for more than 10 years when deciding what is best for you.
Short version of the article below: it is going to cost you about $2,500 to get out of a mortgage with a collateral charge when the term is done. That is not a “payout penalty” but the cost to re-register your mortgage later at a different bank when they try to renew you at a higher rate at the end of your term.
Mark Herman, top Calgary Alberta Mortgage Broker for Renewals
Search "collateral" in this blog search bar to see the other articles on this topic.
A collateral mortgage can trap you: Roseman
You may want to change lenders at the end of a mortgage term. But with a collateral mortgage, your freedom to move will be constrained.
Your residential mortgage is coming up for renewal. Your lender won’t match the competition, so you decide to get a better rate elsewhere.
Moving a mortgage at the end of a three-year or five-year term is no big deal. The new provider usually covers any transfer fees.
But switching is more costly if you have a collateral mortgage. You must hire a lawyer and pay about $1,000 to discharge the mortgage before you can move to a new lender.
Since 2010, TD Canada Trust has sold only collateral mortgages. Tangerine Bank (formerly ING Direct) changed to collateral mortgages in 2011. National Bank also offers them.
Having a collateral mortgage affects your ability to transfer your mortgage to a new lender and your ability to borrow additional funds. It can also affect your ability to discharge the mortgage after repaying the loan in full.Many people don’t know the difference between a conventional and a collateral mortgage, since the information is buried in the fine print of a detailed agreement.
Last August federal Finance Minister Joe Oliver announced an agreement with eight major banks, under which they would voluntarily disclose general information about collateral mortgages at their websites by Sept. 1, 2014, and in their branches by Nov. 30, 2014.
Finally, the banks would provide specific information to consumers who were entering into a new mortgage agreement by Jan. 31, 2015.
Has voluntary disclosure worked? I found almost nothing when checking the banks’ websites. But the Canadian Bankers Association’s website has an article, “Mortgage Security,” to which individual members can provide links.
With a conventional charge, only the amount of the actual mortgage loan is registered against your home. If you borrow $250,000, the lender will register a $250,000 amount as a liability on your property.
With a collateral charge, an amount higher than the actual mortgage loan may be registered against your home. If you borrow $250,000, the lender can choose to register a $300,000 or $400,000 amount.
This allows you to get an extra $50,000 to $100,000 at a later date, secured by the mortgage, without having to discharge the loan and go through a costly refinancing. However, you must meet certain conditions in order to borrow more money.
“You will need to apply and be approved by the lender for the increased amount, based on the current criteria of the lender, your ability to repay the mortgage loan and verification that your home’s value supports the mortgage loan request,” says the CBA.
Dan Faubert, an Ottawa mortgage broker, wrote a blog post last August about thepitfalls of a collateral mortgage. He used the example of John Smith (not his real name), who was denied a loan to fix up his home.
The man owned a home worth $375,000. He had $25,000 left on his mortgage and a $250,000 balance on his home equity line of credit — a total debt of $275,000.
Unfortunately, he didn’t know the bank had registered a $375,000 mortgage against his home. Most collateral mortgages are registered at 100 per cent of the property’s value and some go up to 125 per cent, depending on the lender.
Smith wanted $25,000 to renovate. He was planning to sell his house. But since he was retired and had a lower income than when he borrowed the money, he didn’t qualify for a bank loan.
Faubert couldn’t get him any more money, nor could any other mortgage broker, since the collateral mortgage was registered for 100 per cent of the property’s value.
Smith had borrowed $275,000 and his home was worth $375,000, but there was no equity against which to register a mortgage. It is a dilemma that could face other Canadians who carry a mortgage with them into retirement.
“Any mortgage with any bank that has multiple products in one mortgage is also registered as a collateral mortgage,” says Faubert, who recommends asking lenders for an explanation before agreeing to new financing.
I predict the trend to collateral mortgages will spread. Banks benefit by making it more difficult — or impossible, in some cases — to switch lenders before a mortgage is discharged.
Oliver should check the banks’ voluntary disclosure under the agreement announced last year. Customers need to know in clear terms, explained by a real person and not just in fine print, about a key change to the standard mortgage contract.
http://www.thestar.com/business/2015/02/17/a-collateral-mortgage-can-trap-you-roseman.html
More problems with collateral mortgages
Here is more bad news on collateral mortgages.
People refuse to sign a 3 year cell phone contract but then for some reason have no problem in losing every single thing you have ever made and be sued into bankruptcy by your bank for taking one of these mortgages. Again, we do not offer them but TD, Scotia, ING, and RBC have them as STANDARD. I would rather take a new 3 year cell phone contract!
Beware the pitfals of collateral mortgages
By Mark Weisleder | Sat Jul 30 2011
When you apply for a mortgage, you usually just ask about the term, amount, interest rate and monthly payment. Not many people understand the difference between a conventional mortgage and a collateral mortgage. Yet many banks are now asking borrowers to sign collateral mortgages — and it could result in them being tied to this bank, for life.
With a normal conventional mortgage you bargain for a set amount, rate and amortization. Say the property is worth $250,000 — you bargain for a $200,000 loan, at 3.5 per cent, a five-year term/25-year amortization, payments of $998.54 per month.
A conventional mortgage is registered against the property for $200,000. If all the payments are made on time, the mortgage is renewed on the same terms every five years and no prepayments are made, the balance is zero after 25 years.
Should another lender decide to lend you money as a second mortgage, there is nothing stopping them from doing so, subject to their own guidelines. Under normal circumstances the principal balance on a conventional mortgage goes only one way, down. In addition, banks will accept “transfers” of conventional mortgages from other banks, at little or no cost to the consumer.
A collateral mortgage has as its primary security a promissory note or loan agreement and as “backup,” a collateral security, being a mortgage against your property. The difference is that, in most cases, the mortgage will be for 125 per cent of the value of the property. In our example, the mortgage registered will be for $312,500. But you will only receive $200,000. The loan agreement will indicate the actual amount of the loan, interest rate and monthly payments.
The collateral mortgage may indicate an interest rate of prime plus 5-10 per cent. This will permit you to go back to this same bank and borrow more money from time to time, without having to register new security. The lender will offer you a closing service, to register the mortgage against your property, at fees that will be cheaper than what a lawyer would charge you. Sounds good so far, doesn’t it?
However, this collateral loan agreement has different consequences, which are usually not explained to the borrower.
• Most banks will not accept “transfers” of collateral mortgages from other banks, so the consumer is forced to pay discharge fees to get out of one mortgage and additional fees to register a new mortgage if they move to a new lender. Thus the bank is able to tie you to them for all your lending needs indefinitely because it will cost you too much to move.
• Lenders may be able to use the collateral mortgage to offset any other unpaid debts you have. Offset is a right under Canadian law that says a lender may be able to seize equity you have in your home, over and above the mortgage balance, to pay, for example, a credit-card balance, a car loan, or any loan you may have co-signed that is in default with the same lender. In essence any loans you may have with that lender may be secured by the collateral mortgage. Nobody goes into a mortgage thinking about default, but “stuff” happens in people’s lives and 25 years is a long time.
• Let’s say your house value is $200,000. A collateral first mortgage registered on the property is $250,000. The amount owing on the mortgage is $150,000. If you were to need an additional $20,000, but the lender declines to lend it for any reason, then practically speaking you won’t be able to approach any other lender. They will not go behind a $250,000 mortgage. Your only way out would be to pay any prepayment penalty to get out of the first mortgage and pay any additional costs to get a new mortgage.
• Let’s say your mortgage is in good standing but you default under a credit line with the same bank. The bank could in most cases still start default proceedings under your mortgage, meaning you could lose the house.
• Some lenders are offering collateral mortgages in a “negative option billing” manner. Unless you are informed enough to say you want a conventional mortgage, you will be asked to sign documents for a collateral mortgage.
I spoke with David O’Gorman, the president and principal mortgage broker with MortgageLand Inc. He tells me it is his duty under the law to ensure the “suitability” of any mortgage he arranges for a consumer.
He would be hard pressed to justify the recommendation of this type of collateral first mortgage to any consumer, without disclosing both verbally and in writing the points listed above, and he believes the consumer should have their own lawyer review everything before they sign.
Lending money to people without proper explanation of the consequences is wrong. The banking regulators need to look into this practice and stop it. In the meantime, do not sign any mortgage document without discussing it first with your own lawyer.
Why you do not want a collateral mortgage from TD or RBC
Broker: Clients now suffering collateral damage from collateral mortgages
I have had to say “sorry, we can not help you” to clients with collateral mortgages more than ever in the last year. TD and RBC offer them and here is the bad news about what they mean below.
Short version is: they are not normal mortgages as you promise everything you have to pay them back so they could force you into bankruptcy AND other banks will not let you move into one of their mortgages from one of these so you have to pay legal and possibly appraisal fees again. These added costs usually make it uneconomic to get out of one of these mortgages and move to a different bank for better rates.
Broker fears that growth in collateral mortgages could darken their business horizons have come true, said one broker, pointing to his own impaired capacity to service clients.
“We’re saying ‘no’ more often now than we did in the past, and I can think of no less than six people since last year that we’ve simply had to turn away because there was nothing we could do for them,” David O’Gorman, broker/owner of MortgageLand Inc. in Markham, Ont., told MortgageBrokerNews.ca. “It’s because they’ve signed up for a collateral mortgage with the banks, and have pledged all their equity to that bank. It makes it all but impossible for a second lender to come behind and provide a second mortgage or refinancing or even for a homeowner to switch lenders at renewal.”
Last fall, O’Gorman and other brokers raised the specter of a loss of business stemming from collateral mortgages when one of the major banks announced all new home loans would be secured by promissory note and backed by collateral – usually a first or second lien on the property. That supporting charge can be for as much as 125 per cent of the value, although, doesn’t, in fact, mean the borrower will have access to all those funds.
The collateral charges allow lenders to switch up the interest rate on a loan and lend more money to qualified borrowers after closing, without the client incurring additional legal costs. There is, however, a downside: they also limit the borrower’s ability to shop around for a new lender at renewal or to win refinance or to take out a second mortgage at another institution.
Most mono-lines and banks – as well as the private lenders O’Gorman deals with – refuse to accept the transfer of collateral mortgages, forcing homeowners to pay additional fees to register a new conventional or collateral mortgage in order to move the loan from the lending institution.
The consequences for homeowners are tremendous, said O’Gorman, who wrote to Federal Finance Minister Jim Flaherty last November, outlining his concerns. He also challenged the motives of the bank industry, now prepared to extend its collateral mortgage portfolio.
“Lending money to people, with ‘different to the norm’ conditions and increasing the borrower’s exposure to significant loss, all the while flogging a cheap closing service, enticing the borrower to go without the opportunity of having an independent legal opinion of the documents they are signing, just plain stinks,” he wrote in the two-page letter. “We will have to wait awhile for a decision by a judge crushing the ‘one-sidedness’ of these contracts. In the meantime a significant number of consumers will make ill-informed decisions, unless consumers and/or bank regulators take action.”
A policy advisor for Flaherty did contact O’Gorman for a brief discussion, although the broker doubts the matter will move beyond that initial outreach. He’s more certain about potential negatives for the broker channel as banks continue to shift to collateral mortgages, used to help them retain clients for the full life of the mortgage and not just the first five-year term.
“This is all going to end when mortgage brokers are all working for the banks and they’ve eaten up all the business,” he told MortgageBrokerNews.ca, echoing the sentiments of more than 30 comments posted on the site last fall. “I’ll still make a living, but I’m also concerned about making sure that people are treated fairly.”
TD changing to collateral loans for mortgages – the bad news
TD is changing their mortgages to collateral loans as standard.
We think this is to keep people from refinancing with another bank because TD is not offering competitive rates. There are also some other negative points to the new TD mortgage listed below:
Cons:
- Most chartered banks will not accept “transfers” of collateral mortgages from other chartered banks. If the consumer wishes to switch their collateral mortgage to another lender upon maturity, there will be legal & appraisal costs. Approx $750-$1000
- Upon maturity, would the lender offer only a posted fixed rate or just a slightly lower rate knowing the costs associated with transferring to another lender has legal & appraisal costs.
- Collateral charges allow lenders to change the interest rate and/or loan more money to qualified borrowers after closing. On secured lines of credit, the interest rate registered at Prime + upwards of 10%.
- Collateral loan involves the other debts you may have. Under Canadian law, a lender may seize equity to cover other debt you have with the same lender. So, in essence, you’re possibly securing all your loans that you have with that financial institution; be it credit cards, unsecured lines of credit, car loans, or overdraft etc.
Now the Pros:
I can’t think of any!
Ensure you do your home work on TD mortgages. There are lots of other lenders and lots of alternatives.