That’s why some were disappointed to hear today’s announcement by ING Direct Canada (ING) that all of its new mortgages will be registered as collateral charges.
The main rub with collateral charges is that it’s harder to switch lenders without paying legal fees. Collateral charges also impact people’s negotiating leverage at renewal and restrict borrowers from taking out second mortgages or HELOCs elsewhere (unless one’s property value skyrockets).
The upside, however, is that ING customers with collateral charges will now be able to refinance (with ING) without any legal costs.
Kim Luxton, Director, Broker Sales, confirmed today that ING will register all of its new mortgages collaterally, at 100% of the property value, starting December 10, 2011.
Here’s what that means:
Suppose your house is worth $200,000 and you get a $100,000 mortgage.
ING will “register” the mortgage for $200,000 (i.e., 100% of the property value).
That lets it lend you up to $100,000 more without refinancing with a lawyer.(Future borrowing is subject to qualification and normal loan-to-value limits.)
ING says it made this move because more people refinance than switch, and because collateral charges help clients avoid legal fees. It estimates the average savings in legal costs will be roughly $800 per refinance client.
So, are consumers better off with collateral charges? Here are some relevant stats:
10% of mortgage borrowers took out equity in the past year (source: CAAMP). Not all of those had to refinance, however. Some used secondary financing.
8.6% of mortgagors renewed on schedule at maturity (source: CAAMP)
Only 21% of borrowers who renewed or refinanced changed lenders (source: CAAMP)
38.75% of broker approvals were for refinances. Only 3.9% were for switches (source: ING, quoting D+H stats)
These stats suggest there’s a majority of people who could benefit from free legals when refinancing. Nonetheless, there’s also a minority of ING customers who will now pay more when they:
a) leave ING at maturity, or
b) need to refinance elsewhere (as a result of ING’s 100% registration policy which prevents secondary financing through other lenders).
Among the people who don’t need to refinance, most stay with their existing lender anyway. That’s why lenders argue that collateral charges may be negative for some borrowers, but they’re helpful for the majority.
In ING’s case, instead of giving customers the choice of standard or collateral charges, it decided on a “simple” solution to make all of its mortgages collateral. TD did the same thing when it switched to collateral charges in October 2010.
ING says that decision is related to the launch of its upcoming HELOC, in which case using one registration method will “simplify and reduce documentation.” (That said, one brokerage executive we spoke with questioned why ING chose to launch collateral charges before it launched its HELOCs.)
For customers who will now have to pay to switch lenders, there may come a silver lining, says ING’s VP Lending, Martin Beaudry. “Trends in the marketplace show that lenders are more and more willing to cover a reasonable portion, if not all, of the cost necessary to refinance a mortgage…(because) they figure the long term value of that customer is really good,” he said.
He’s right. As additional lenders jump on the collateral bandwagon, and as more consumers get HELOCs, lenders will increasingly start paying for refinances—just like they pay for transfers now.
(Incidentally, Beaudry says the extra cost of paying for a client’s refinance is “fairly small,” compared to the money lenders shell out as part of their free transfer programs.)
While relatively few lenders cover refi legal costs currently (without jacking up the interest rate), they may soon have to; that is, if they want to woo clients from their existing lender.
Attracting the competition’s mortgage customers isn’t easy. Eight in ten borrowers end up staying with their lender at renewal. There are two primary reasons for that:
1) people hate hassles, and
2) client retention is a top lender priority.
As a result, the demand for “free switches” is less than one might think.
ING expects no loss of broker support as a result of collateral charges. Luxton says these new measures actually help brokers “better compete” with the Big 5. She says that’s because brokers will now be able to offer ING clients a streamlined method of taking out equity with no legal cost. In addition, brokers will be compensated on the “top-up” portion when clients increase their loan amount by 20% or more.
As TD’s move to collateral charges surprisingly showed, this method of registration has had no adverse impact on market share in the broker channel. Given that, and the fact that collateral charges discourage switching, and the fact that they reduce a borrower’s negotiating leverage, more lenders will likely adopt them.
(One industry exec we talked to, who prefers to remain nameless, calls collateral charges a “client retention miracle.”)
As a matter of fact, at some point you might even see it become a point of differentiation for lenders to not have collateral charges.
Regardless of the benefits of collateral charges, the cons (for some clients) can’t be denied. That’s why we would have preferred that ING give clients that choice of collateral or non-collateral. Ask 100 clients and we’d guess at least 8 in 10 would want this choice. But ING’s collateral charges will help more people than they hurt, so we can’t take that away from them.
Here are some FAQs on ING’s new collateral charges:
How will this affect existing ING mortgage customers?
It won’t…until renewal. At maturity (if a customer stays with ING), ING will re-register the customer’s mortgage as a collateral charge, at no cost.
What’s the process for requesting more funds? ING clients with collateral charges can use their broker to request more funds, or call ING’s help desk. It involves a new application and income verification (albeit, ING might only ask for a recent pay stub instead of full income proof).
Is a new appraisal required to withdraw more equity?
When a customer wants to increase his/her borrowing inside of a collateral charge, an appraisal may or may not be required. It’s a case-by-case basis, says Luxton. Beaudry adds: “Unless there is a major economic downturn, we would likely not require another (full) appraisal.”
Will compounding change?
No. ING mortgages will still be compounded semi-annually, including its variable-rate mortgages.
Do ING clients with collateral charges have to get a HELOC? No.
Can ING clients with a collateral charge add a HELOC later with no legal cost?
Yes, if they qualify.
Sidebar: ING says its new HELOC will officially launch in “early 2012” (likely Q1). Once it does, ING will also roll out a new refinance program to help clients refinance with less cost and hassle.
Some may wonder how borrowing from a HELOC is consistent with ING’s “unmortgage” philosophy that advocates paying down debt. Beaudry admits, “We’ve had philosophical discussions (about) whether a HELOC is a product we can offer under our brand.”
“After much debate,” he said, ING concluded that not all debt is “bad debt.” Two examples of “good debt,” he noted, are debt consolidation and borrowing for renovations. Another example would be borrowing to purchase prudent investments.
Despite all that, ING’s HELOC will not be automatically readvanceable like its major competitors. Beaudry says that’s because, “We don’t want to make credit too easy to get.”
One last point. Beaudry foresees a noticeable jump in refinancing when rates start rising. He states: “We think refinances will increase significantly as consumers deleverage and get away from high interest rates.” That’s another reason ING felt the timing was right for this change.
Rob McLister, CMT
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