Entries from January 2013 ↓

What a deal


Do you have a Manulife One mortgage? Or a Scotia Total Equity Plan? How about a mortgage from National Bank, ING or TD? If so, did you understand when you were signing up that you might not be able to transfer your loan in future, or  your lender could arbitrarily increase the interest rate for the life of the debt if you miss payments?

That’s because these aren’t really mortgages, but collateral charges. And they’re all the rage among bankers these days. No wonder.

I first wrote about these things two and a half years ago when TD shocked most people by converting all its new mortgage business to collateral loans. Days ago the CBC probed a bit and tried to entrap a lowly TD loans officer, who I hear is now an attendant in the men’s room. It’s probably only a matter of time before conventional mortgages are hard to find, which would be a shame. And a mistake.

Simply put, as I explained before, a collateral mortgage is a loan which is backed by a promissory note which is in turned backed by security, whereas a conventional mortgage is just a loan secured by a house. Normally the only people who are asked to sign collateral mortgages are those who use their houses to arrange lines of credit with balances that can balloon, not a regular mortgage with a fixed amount owing and a standardized payment. With a conventional mortgage there are strict rules about how much you can borrow determined by the value of the property when you take the loan. Not so with a collateral mortgage, because it’s actually a loan which is backed by your promissory note. That means you can borrow more than your house is worth.

That’s why TD, for example, routinely signs up people for 125% of what they actually need to buy a house. The ‘extra’ is available to them as a line of credit to, you know, buy something useful, like a condo.

There are a few things you should know if dealing with some of the lenders mentioned above. First, a mortgage is secured by a house so moving it to a new lender is simple if you get a better deal. But a collateral mortgage can’t move because it’s backed by a note and acts like a personal loan. So it has to be discharged and a new mortgage arranged – a process which costs big.

Second, not only do some lenders register a collateral mortgage for a greater amount than you borrow, but they also register potential higher interest rates. If you screw up and don’t pay on time, the rate could be increased as much as 10%, since the charge is actually registered at a rate of prime plus ten.

Thirdly, collateral mortgages often encompass more than a real estate loan. You can fold in a line of credit or, in the case of the ManOne product, your savings and chequing accounts, car loans and personal borrowings. There are definite advantages to doing this, since every time you’re paid your loan balance falls and interest charges are reduced. But if you fall behind, the lender has the right to up the cost of the entire package.

That’s a big difference from missing a few mortgage payments, receiving a lawyer’s letter, then getting caught up with no threat of a rate change. It might also make you think twice about having a collateral mortgage at the same place you keep your RRSPs, tax-free accounts or your kids’ RESPs. (Better read the mouse print.)

So why would banks be moving in this direction? Simple. Customers get trapped by the legalities of collateral charges and stay customers longer. After all, moving is now complicated and costly. Plus, with a mortgage that can morph into a LOC with no additional fees to pay or apps to complete, it’s just so damn easy to borrow more. And never forget that what’s a debt to you is an asset to the lender – the bigger than better.

Finally, consider this worthwhile observation from Canadian Mortgage Trends: “In some cases, defaulting on another debt owed to a collateral mortgage lender can put your house at risk. That’s because that lender can theoretically seize your home equity if you don’t pay that other debt. (This is called “offsetting” in legal parlance.)”

As I said, some products like ManOne and the Scotia Equity Plan make perfect sense in a perfect world. All the debt in your life is puddled together and offset by all your income and savings. Interest charges can be slashed and debt repayment time crushed. This financing-for-dummies approach works, until something crappy like a job loss or a real estate crash comes along, and you suddenly have fewer options.

Given what’s ahead, I’d want to know that.



The sky was white. The ground was white. The air was white. I stared out the window and watched a couple of giant black wheels dangle unfulfilled in the alabaster nothingness before returning to illegal emails on my phone. Moments later I glanced again and saw a shard of water and what looked like…whoa!

The Q-400’s engines revved insanely and the plane lurched skyward, peeling back from the unseen short, fat runway at the Toronto island airport, the one with open water at both ends. Minutes passed as the craft stormed higher, then the captain’s voice: “The conditions for landing have not been met. We’re trying again.”

A half hour later we were low enough that only a few feet separated the newly-deployed wheel from the enshrouded asphalt, when again we careened and aborted. And the captain said we were done. Next stop, Montreal.

So this is written from a cheesy hotel on the airport strip outside Dorval’s Trudeau airport, where it is snowing (of course) with freezing rain moving in. I may have to vultch a condo and move in until Spring comes to this forsaken city in June.

Being in a pissy mood and missing my dog, I’ll be a little briefer than usual. Besides, I want you to read Kristi’s letter and respond (I’d just make her cry). First a few words on the big banks, which were downgraded on Monday by a giant rating agency. Is this the big deal some are making it out to be? Is your money safe in the bank? How about your bank stock, or those ETFs with bank exposure?

In case you missed it, TD, Scotia, CIBC, BeeMo, National and Desjardins had their long-term ratings zapped by Moody’s. The reasons sounded ominous. The move came because of “our ongoing concerns that the Canadian banks’ exposure to the increasingly indebted Canadian consumer and elevated housing prices leaves them more vulnerable to unpredictable downside risks facing the Canadian economy than in the past.”

This jives with the never-ending bleating we hear on this blog about how a housing correction in Canada will topple the towers at King & Bay the way the US crash killed Lehman, Bear Stearns and most other American investment banks. Some people think if prices continue to sink in Victoria, Vancouver, Edmonton or Mississauga (they will) that banks’ mortgage portfolios will be gutted, profits tumble and share prices halve. This is clearly what Moody’s was digging at. And it’s plain wrong.

The market evidence to the contrary has been overwhelming. Bank stocks have gained 5% even while the downgrade was expected, and then took place. The bond market sniffed, then shrugged. In other words, the move was utterly ignored by the financial markets and bank equity or preferred investors lost nary a dime. This is the way it will continue.

The big difference between our bankers and Yankee ones is the feds. Even though there are more than $300 billion in high-risk, high-ratio mortgages floating around bank balance sheets these days, CMHC has provided default insurance on the whole mess. It always amazes me how first-time buyers with skimpy downpayments think the mortgage insurance they’re forced to buy protects them in case they can’t make payments. Of course, it protects the lenders, which means they can give tons of money to people too useless, lazy, juvenile or unfocused to save, and the taxpayers guarantee repayment in the event of default. So mortgage arrears numbers mean didly in Canada.

The real risk is a crash in housing values and a plunge in homeowner equity would scare the bejesus out of consumers who would stop spending, wreaking havoc on the Best Buys of this nation. A general slump there, plus a dive in construction, would hurt bank operations and profits. This is a far more credible scenario, but even that won’t happen.

As this pathetic blog has stated with boring repetition, we are in for a year of melting prices which will reduce the national average by about 15%. That means way more in Vancouver, less in the sexy bits of the GTA, spotty mayhem in 905, big surprises in Saskatoon and Winnipeg, a grinding erosion in both Halifax and the damn city I am currently imprisoned in. The banks know this is coming. They’ve seen mortgage numbers shrivel, and they have a plan.

There are lots of things to worry about. The big banks are not on that list. But Porter Airlines is.

Now, here’s Kristi. I like this letter so much I will not spoil it with a response. Not today, anyway. But since this hot, young nurse has entered our sanctum, go for it.

My name is Kristi and to be quite honest, I had never heard of you before last week and had little interest in the financial world.  I did my best to ignore the episodes of Real time with Bill Maher that my husband would watch and felt my eyes glass over with boredom whenever talks with my husbands colleagues at dinner would turn to politics or finances.  I thought the globe and mail was for my grandpa and found myself zoning out when my dad would go on about “why he hates mutual funds” (you get the picture).  However, I wanted to share a recent experience with you that led me to learning about you and your blog and ultimately that it is likely in my best interest to give a damn about this stuff.

My husband and I recently went on a snowboard trip to banff.  Along the way we made  a stop to visit one of his med school buddies and his wife in Calgary.  She is a physiotherapist and I am a nurse, leading us to usually centre our conversations around the woes of the healthcare system.  During this visit however, over several glasses of wine his wife began to explain to me that she is an avid investor in the stock market.  In fact she invested in her first stock at the age of 16 and over the span of the last 4 years has seen a gain of $250,000 in her investments.  Laughing at my undeniable shock she said, “You don’t just let your money sit in the bank do you?  It can’t possibly keep up with inflation, which means you are actually loosing money”.  I felt my face flush at my ignorance and tried to play it cool.  What the hell was inflation?  And where else would I put my money besides in the bank?  Upon learning this information I took a second look at her and marvelled at the following:  How could this be possible?  She is gorgeous, blonde, funny, stylish, makes a salary similar to my own, AND has 250,000$ sitting in the bank??!  I felt myself choke on my wine.  Myriad feelings passed through me at that moment- Why the hell hadn’t anyone taught me this crap at age 16? Why had I never decided this was important to take notice of?  Immediate waves of envy mixed with admiration and motivation coursed through my veins.  We aren’t so different her and I.  In fact up until this moment I thought we had a lot in common.

Perhaps I too could learn how to invest in the stock market to better my financial future.  My whole life (i’m 27 ) I feel I have never taken a real interest ( save starting a savings account and opening a TFSA upon the advice of some guy at the royal bank) in money or financial interests.  I suppose the truth is, I always felt afraid to ask, as if that might reveal some flaw in me that I didn’t want others to notice.  I so far have managed to sock away 10,000$ of my own money in TSFA’s and also open an RSP with 15,000$ in it.  But unfortunately, I have absolutely no idea what any of these things mean for my future or present financial situation.  I got married a year ago and my husband is a doctor, which has prompted me to face the undeniable fact that I am now an adult and should have the balls to face my ignorance on the topic and gain a little financial confidence.

Do you have any suggestions for a newly wed nurse and doctor??(Keeping in mind that I’m not sure I even know the true definition of a stock…I’ll need to start with the basics)