22 Mar

Always good to be Informed


Posted by: Edward Robertson

Canadians couldn’t get answers on mortgage deferrals at Canada’s biggest bank because information and eligibility requirements kept changing almost by the hour, a source who works for RBC tells CBC News..
When the first details were eventually given out to frontline employees at RBC’s Mississauga call centre, they revealed deferrals would be available to all mortgage holders, but in a way that appears to ensure the bank would not lose money in the short term and may even come out ahead.
“Deferrals actually meant that interest accrued from each deferred payment was being added back into the principal balance of the mortgage,” said the source.
“Technically clients would then be [charged] interest on top of interest for those payments [that were] deferred,” they said.
In effect, it’s as though the bank is loaning you the amount that you would have paid in interest during the deferral period and then charging you interest on that loan as well.
“They’re going to make more money because they’ve just loaned you more,” said Peter Gorham, an actuary with JDM Actuarial Expert Services.
“I don’t know that I want to say it’s profiting. I would say it’s not costing them a penny.” he said.
“People are increasing their debt load. If you are not desperate for the financial relief, don’t take it.” Gorham said, adding RBC and other banks are taking on increased risk from deferrals, a risk that could grow significantly if the COVID-19 crisis runs from months into years.
When it comes to repaying the increased debt load from a deferral, there may be other complications for mortgage holders.
“This also means an increase in clients’ payments at their next renewal period due to the increase in mortgage balance,” the source at RBC said.

RBC frontline employees at one of the Bank’s call centres were overwhelmed with calls and had no information to provide customers, a source tells CBC News.
If the client doesn’t want a bigger payment, they can extend the amortization period, the source added. But that typically requires a full credit application which may affect their credit score.
The other option is making extra payments after the deferral period ends to bring the mortgage back down as quickly as possible to its original amount.
A spokesperson for RBC said no one was available for an interview.
Two other big banks have mortgage deferral polices similar to RBC’s.
In an updated set of deferral FAQs posted on its website, Scotiabank too says interest will continue to accrue.
“You will pay more interest over the life of your mortgage, but a deferral will also help you with your short-term cash flow,” the banks states on its website. Scotiabank is also offering deferrals on personal and auto loans, lines of credit, and credit cards.
On its website, BMO also states interest will continue to accrue on mortgages.
Credit card deferrals
RBC is also offering six-month deferrals on credit card payments, according to an email obtained by CBC News. But once that period ends the minimum payment would include all accrued interest from the deferred payments. Meaning the minimum payment could jump significantly.

© Obtained by CBC News A section of an email obtained by CBC News which was sent to RBC employees with instructions of how to respond to customers seeking a deferral on credit card payments. The email was sent on March 18 at 1:16pm EDT.
Most minimum payments on credit cards are interest plus $10. But Quebec passed a law in 2017 changing minimum payment requirements in an effort to counter rising household debt by making people pay off more than just accumulated interest.
Minimum payment on credit cards in Quebec is 2.5 per cent of the balance owing and will eventually rise to five per cent.
Last week, all of Canada’s big banks agreed to a request from Federal Finance Minister Bill Morneau to defer mortgage payments for up to six months for people suffering financially due to COVID-19.
The banks issued a joint statement saying they “have made a commitment to work with personal and small business banking customers on a case-by-case basis to provide flexible solutions to help them manage through challenges such as pay disruption due to COVID-19; child-care disruption due to school closures; or those facing illness from COVID-19.”
But initially many Canadians looking for deferrals said, after waiting for hours on hold, they were told they didn’t qualify. One BMO customer — who is actually a former BMO branch manager — said he was told he needed a full credit check and credit application and even then the bank would not tell him their criteria for approval.
It turns out the person he spoke with may not have known the criteria themselves at that point.
By midday Wednesday, workers at RBC’s Mississauga call centre still hadn’t been informed.
WATCH | Consumer frustrated at lack of information about mortgage deferrals
“Anyone calling in to RBC between 8 a.m. and noon was directed to call back ‘later’ as we had been given no direction or timeframe as to when relief procedures would be implemented, other than ‘soon,'” a source told CBC.
On March 13, the finance minister said that he had already spoken with the CEOs of the big banks. The banks issued their statement promising to work with Canadians on a case by case basis on the evening of March 17, around 7 p.m. ET.
Canadians began calling their banks the morning of March 18.
But, as late as March 20, Canadians were still being told no information was available.
“I was on hold for 11 hours [March 19] and then five hours [March 20],” said Lindsay Gillespie, who has a mortgage and a line of credit with FirstLine Mortgages, a division of CIBC.

© Blair Gable/Reuters Canada’s Minister of Finance Bill Morneau at a news conference in Ottawa, Ontario, Canada March 13, the day he told reporters he had spoken with the CEOs of Canada’s big banks.
“I finally got through and was told there’s nothing that can be done right now, they don’t have anything set up. I was told to call back another time,” she said.
Also as late as March 20, some RBC customers were still being told they didn’t qualify for a six-month deferral.
“We called RBC and were told that deferrals are being assessed on a case-by-case basis and that our eligibility for a deferral is limited to six weeks,” said Jeff Hecker, a principal at a Toronto Marketing research firm.
“No explanation was provided,” he said.
Some in the mortgage industry say the confusion over deferrals is understandable, given the unprecedented and rapidly changing nature of the COVID-19 crisis.
“You’re going to get hiccups in this process; it’s never happened before,” said Robert McLister, mortgage expert and founder of RateSpy.com.
“It’s case-by-case, it’s completely at the lender’s discretion as far as I understand it. Even though the big banks have agreed with the federal government to offer these programs, there’s no mandatory federal guidelines that I’m aware of,” he said.
McLister says it’s possible some people are being declined mortgage deferrals because they can’t prove their income has dropped.
“But generally speaking if you are in legitimate need and you’re about to default on a mortgage payment the lender is going to work with you,” he said.

4 Mar

Fixed-rate Collateral Mortgage

Mortgage Tips

Posted by: Edward Robertson

I came across the information and thought everyone should know this…

In late October 2010, Toronto Dominion (TD) Bank very quietly tweaked the way it registers its mortgage loans.
While this might have at first seemed like a small change (and that’s certainly the way the bank positioned it at the time), it has had a significant impact on the overall borrowing costs of many of TD’s customers since then.
Here is what changed: TD now registers all of its new mortgages as collateral charges [Editor’s note: several of the other Big Six banks subsequently copied TD’s move]. This was an unusual move because while collateral charges are common for mortgages that include home-equity lines-of-credit (HELOCs), they have not been used for mortgage-only loans.
In effect, TD’s move to universal collateral charges has now made it more expensive for borrowers to move to a different lender at renewal under the guise of making it cheaper to borrow more money from them in the future.
This begs the question: If the threat of switching lenders is your best way to negotiate a fair deal at renewal, what happens to your leverage when the bank neutralizes that threat by making it more expensive to leave than to stay?
First, a little background. There are two ways a lender registers a loan when your home is used as the security, as a standard charge or as a collateral charge:
Standard charges are registered at the Land Title or Land Registry Office (depending on the province), and can be registered, transferred or discharged. That means that if you want to switch, or transfer, your mortgage to another lender at renewal, you can do so for minimal cost (approx. $30), which most lenders will cover.
Collateral charges are registered under the Personal Property Security Act (PPSA) and can only be registered or discharged (not transferred). If you have a collateral mortgage and want to change lenders, you need to re-register a new mortgage on your property’s title, and this will cost about $800 plus tax. As such, switching your fixed-rate mortgage from TD to a different lender at renewal will cost you a little under $1000.
But that’s just the tip of the iceberg.
Borrowers are also being encouraged to allow TD to register a collateral charge for up to 125% of the current value of their home when they take out a mortgage with the Bank. The pitch is that doing this makes it cheaper to borrow more money from TD in the future (because the charge does not have to be re-registered). This way, even if your house goes up in value, you can tap into that extra equity without having to consult anyone other than your TD Bank rep (assuming you qualify).
Sound convenient?
Maybe, but this convenience has a downside.
For starters, every lender requires you to buy title insurance that covers the amount of the charge registered on title. As that charge increases, so too does the cost of your title insurance.
Worse still, by giving the bank the legal right to the first 125% of your home’s current value, any equity that you have built up in your home is then worthless as collateral to any other lender.
Here is another example of where TD’s latest change could come back to bite you.
Let’s say you needed to borrow 75% of the current value of your property and after hearing TD’s pitch you decided to let them register a collateral charge of 125%. Assume then that two years later with your wife on maternity leave and a new baby to support, you are having trouble making ends meet.

You contact TD to apply for an increase in your credit line, but with your credit score impacted by some recent missed payments, they decline your request. You contact a mortgage broker who has numerous alternatives for you to consider, but because TD has locked up 125% of your home’s value, your only option is to break your current mortgage and re-borrow the entire amount somewhere else.
In addition to having to pay a potentially huge break penalty you will also now incur legal and discharge fees to register a new mortgage, and of course, with a temporarily low credit score you won’t be able to qualify for the best rates anymore.
Had you financed your original fixed-rate mortgage with almost any other lender, they would have registered your loan as a 75% mortgage charge instead, and you could have easily added secondary financing elsewhere while keeping your existing mortgage and rate in place (with no penalty or discharge costs to worry about). In this example, the difference in overall cost is easily in the thousands of dollars, and that’s without assuming that all of this could be happening in a rising interest-rate environment.
If you’re surprised that TD would design a product this way, don’t be. It’s not easy making $1 billion+ in net income every quarter and since mortgages account for about one-third of the Big Six banks’ retail profits, this is a cash cow that has to be milked.
Today about two-thirds of Canadians still walk into their local bank branch for mortgage advice and most of them sign whatever is put in front of them. Why wouldn’t TD take advantage of this by registering your mortgage in a way that makes it cost prohibitive to ever get off of their comfy green chair? Especially when borrowers won’t even realize what they’ve traded off until years later?
Squeezing a little more profit out of mortgage customers isn’t new. It’s tried all the time, for example, by offering renewing mortgage customers posted rates (one-third of whom actually sign back the offer). I’m not surprised TD is trying to maximize its profits, but I am surprised when customers place their blind trust in the hands of an organization that has proven to be world-class at achieving that end (here is a CBC Marketplace segment on the topic).
One final thought: In retail banking, three is the magic number.
The odds say that if a bank can sell you three products, you will be theirs for life, probably because the cost and hassle of switching become too prohibitive. Since most bank mortgages are based on fixed rates (which are, to no one’s surprise, more profitable), registering them as collateral mortgages makes it easier, and cheaper, to sell customers other products like lines of credit and secured credit cards (to get to the magic number three).
The question for you to consider is, does being viewed as “a customer for life” help or hurt your negotiating leverage, especially when the bank knows how much it will cost you to leave?
If you want my advice, consider TD’s stock, but think twice about its fixed-rate mortgages.
Follow-up note: while TD was the first major bank to adopt this policy, several of the other major banks have since followed suit. It’s too bad that these lenders have decided to adopt a policy of using collateral mortgage charges across the board when it seems entirely inappropriate for many of their borrowers. I can only assume that they did this to improve profitability, which may well be the case until enough customers start voting with their feet! As always, forewarned is forearmed.