Effective January 31, 2015, the Department of Finance says banks will start warning individual consumers about the implications of collateral charge mortgages “before entering into the mortgage loan agreement.”
The DoF says “consumers require sufficient information in order to more clearly understand the costs and consequences of a collateral charge mortgage relative to a conventional mortgage.”
One of those consequences, it says, is that “some consumers may find it difficult to switch between different lenders” when they have a collateral charge. That’s because lenders don’t typically accept collateral charges from other lenders on “switches.” Most require such mortgages to be refinanced, requiring legal fees of $500 to $900+.
Collateral charges have been hit with a slew of negative press in recent years, culminating in this exposé by CBC’s Marketplace. In reality, however, they’re quite routine with readvanceable mortgages — a popular form of mortgage that includes a line of credit.
For mortgages without a line of credit, collateral charges are far less useful. Lenders tout them as cheap ways to refinance but they fail to mention that what you save in legal fees can easily be consumed by potentially less-than-favourable rates on any new mortgage money you borrow. Remember, lenders rarely offer best rates when they know you can’t leave without paying a penalty. And, of course, you have to re-qualify for any new money borrowed.
As of September 1, major banks have all added collateral disclosures to their website. Here’s RBC’s for example (note its warnings, with our comments in italics):
- With a traditional mortgage, “Your new lender may cover some or all of your costs to switch.”
(In practice, most lenders cover your legal and appraisal fees on regular mortgage transfers.)
- “Some lenders may not accept your request to transfer your existing collateral mortgage to them…If you wish to transfer or switch your existing collateral mortgage to a different lender, you will most likely have to pay fees to discharge your existing mortgage and register a new mortgage with the new lender.”
(“Most likely” as in over 90% of the time.)
- “…When you discharge your collateral mortgage, your current lender can require you to repay any additional funds that have been secured by the collateral mortgage, such as car loans.”
These new disclosures aren’t easy to find. We spent 20 minutes scouring one bank’s website for its online disclosure, followed by 15 minutes on hold and 25 minutes floating from telephone rep to telephone rep, asking where on the bank’s website the disclosure could be found. Three reps (including a credit representative and a second-level banking support agent) had absolutely no idea what the disclosure was. One flat-out said it wasn’t on the site at all, until we showed him that it was.
Those anecdotes aside, these disclosures are a positive and much-needed initiative. And we have the Department of Finance to thank for them. But banks need to make them more prominent and show examples of the real costs of a collateral charge.
Rob McLister, CMT