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Readers have asked why I have not blogged to date on why some banks are converting clients over to collateral mortgages as opposed to conventional mortgage products, most notably TD/ Canada Trust on October 18, 2010. The concept is certainly not new, (think homeowner line of credit), so not particularly newsworthy or relevant for most consumers or at least the consumers wise enough to consult a mortgage broker.

The reasons behind the shift depend on your belief of the bank rational, or your belief that there may be other motives behind the move. The banks position is that by registering the collateral charge for a higher amount than the actual mortgage, let’s say to 125% of the property value, then the client could increase their mortgage in the future up to that amount, without incurring the legal cost and transfer fees associated with registering a new mortgage. This is true.

The problem for consumers with this type of product is that should they wish to switch lenders in the future to take advantage of competitive rates, then they will incur the legal cost and transfer fees to convert back to the conventional mortgage products offered by most other lenders. Lenders such as TD recognize that their retention ratios for refinances will improve if additional barriers of exit are created.

Banks call these products ‘customer retention devices’. Good mortgage brokers will always fully disclose such information where is suspect the banks may not. I see only the positive attributes of the collateral mortgage product in the promotion material provided by the banks. Buyer beware.

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