TD is making a big change with respect to how it registers its mortgages.
Effective October 18, all new TD mortgages will be registered as “collateral charges.”
A collateral charge is a different way to secure a home loan than a standard mortgage. "The terms of a collateral mortgage are outlined in a loan agreement that's not registered," says Invis's Gary Siegle. "With a regular mortgage, the terms are in a 'registered document'."
Effectively, collateral charges allow lenders to change the interest rate and/or loan more money to qualified borrowers after closing, without involving a lawyer.* That saves the borrower legal costs if he/she needs to withdraw equity from their home.
In TD’s case, customers will now be able to register their mortgage for up to 125% of the value at closing. Hence, if one’s property value goes from $200,000 to $250,000, qualified borrowers will be able to withdraw most of that new equity without refinancing.
"If I'm a consumer and I'm told that I can get more money in the next few years without extra cost, I would think most consumers would find that appealing," says Siegle.
The downside comes at renewal. For consumers who want to keep their options open at maturity, this is an unfriendly change. That’s because TD customers will now have to pay legal fees to switch lenders.
Obviously, people switch lenders for many reasons, not the least of which is better rates or features. And, with most other lenders, you can switch your mortgage for free, save for the discharge fee or other minor charges.
From our own informal polls, many industry observers we’ve spoken with view this change largely as a strategy to retain customers at renewal. If this is TD’s intention, they’re definitely not the first lender to think this way. There are various credit unions, for example, that register all of their mortgages as collateral charges. There are also banks that push readvanceable mortgages (which also use collateral charges), for similar reasons. TD itself has used collateral charges with its variable and HELOC products for a while.
For now, it’s difficult to assess the impact of this change. Everyone needs to renew, but not everyone needs to refinance. So TD’s move will benefit some while hurting others.
On the other hand, most mortgagors renew with their existing lender anyway, so the number of TD customers who refinance may be higher than the number of people leaving TD at renewal.
That depends on the term, of course. Someone in 1-year fixed has a low probability of refinancing. So, other things being equal, TD will now be a less attractive option for standard 1- to 3-year terms.
In any event, TD customers need to be aware of both the pros and cons of this move.
One thing we’re not certain of at this time, is how existing TD mortgages will be affected. TD spokesperson Kelly Hechler said TD would release a clarification on this soon.
We’ll post more information in the comments section as it becomes available.
* A collateral charge generally doesn’t allow a lender to change a fixed rate or the discount on a variable-rate mortgage. However, it does allow the lender to change the rate if you ask for more money later, or if you have a line of credit portion with a floating rate.
Update – Oct. 8: TD has confirmed that this change will not affect existing TD mortgages that close before October 18.