Buyer Beware – Always Read the Fine Print
TD Bank has changed the fine print of its Variable Rate Mortgage Contracts for conventional mortgages.
Under the terms of the new clause, if at any time the loan to value ratio of your mortgage exceeds 80 per cent, the bank has the right to demand that the borrower bring it under the 80% threshold, or to obtain an appraisal in order to prove that the fair market value does not exceed the 80% threshold. The appraisal will likely be at the homeowner’s expense.
The old clause had a similar clause that triggered at 75%, however the bank was limited to situations where the interest rate fluctuations have driven the loan to value ratio to be above the 75% threshold.
This change is likely due to concerns TD Bank has about the future of the Canadian real estate market, and fears that home prices are going to decrease in the future.
How can this change affect you?
First, it’s important to consider what is Loan to Value Ratio. The term is commonly used by banks and to represent the ratio of the mortgage as a percentage of the total appraised value of the property.
For example, let’s say you purchased a home for $500,000 and you plan to pay 20% of the loan, so $400,000.00. In this circumstance your loan to value ratio would be 80%. However, if the market decreases, and the value of your home decreases to $400,000, and you still owe $350,000 on your mortgage, the loan to value ratio would now be 87.5%. According to this new clause, in the above mentioned example, TD Bank would be able to ask you for an additional $30,000 in order to bring the Loan to Value Ratio back to 80%.
Nobody can say for certain what will happen to property values in Canada. Ask 10 people and you will likely get 10 different opinions.
The problem, is that property values are often outside of the control of the borrower, and this new clause can force the borrower to have to come up with significant amounts of money, or else the mortgage could be called.
This change is only in regards to conventional variable rate mortgages, so where the initial down payment was at least 20% and mortgage insurance was not required.
If you have an open variable mortgage, typically you can convert to a fixed rate mortgage at any time. If the borrower finds themselves in a situation where they have to pay a significant amount of money to bring the mortgage to the 80% threshold, will TD Bank will still allow the borrower to convert to a fixed rate mortgage to avoid the payment? Another question is whether TD Bank will allow the borrower to purchase mortgage insurance and convert to a high ratio mortgage as an alternative to bringing the mortgage to the 80% threshold.
It remains to be seen whether any other banks or lending institutions will follow suit. However, this is something to consider when getting a new mortgage for your home.