Banks are improving their disclosures on the draw-backs or collateral mortgages – YAY! It’s about time that there more transparency will be required of major banks.

Transparency is very important to you, the consumer, as you can make an informed decision of whom you would like to conduct business with. The broker channel has been bombarded with so many disclosure forms since January 2009 and I believe that the lenders – whether it is a bank, credit union, trust company, investment firms – should have similar disclosures when they are dealing directly with consumers as it is their fiduciary duties to do so.

Canada’s eight largest banks recently promised to provide more information about collateral mortgages; including online educational resources and better training for bank employees to help them better explain the difference between collateral charge mortgages and their conventional counterparts.

“Our government is standing up for consumers and saving Canadians money,” Finance Minister Joe Oliver said of the voluntary policy.

As a broker, I believe the move signals one small step to better protecting clients – especially those who may encounter financial trouble.

In this economy you never know when you may be downsized, laid off or some other unforeseen life event may happen; you need to have all your options available. Clients I have talked to had no idea that when they signed their collateral mortgage agreement they gave up 100 to 125 per cent of the value of their home.

If you had needed to obtain a second mortgage to get them through a financial set back they would not have the equity or freedom to obtain a second mortgage.

Collateral mortgages, however, are 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 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.