The latest move by a big bank to respond to the financial crisis by jacking up interest rates raises a question.
Do we heap abuse on Toronto-Dominion Bank for sending out letters to clients recently announcing that rates on secured lines of credit will rise to prime plus one percentage point on Nov. 16 from just prime? Or, do we give TD credit for holding the line on credit line rates until now?
The many TD customers I've heard from are uniformly angry, although it must be noted that people rarely e-mail personal finance columnists to say how delighted they are with their bank. And yet, TD could well be the last lender of note to increase rates on secured lines of credit, commonly known as home equity lines of credit, or HELOCs.
What's bugging TD customers is that the bank's rate increase comes amid strong signs of a rebound from the catastrophic days of last fall. For example, the stock markets are up more than 50 per cent from their lows of March, and the housing market here in Canada is smoking hot in some cities. Also, some interest rates that rose because of the financial crisis are starting to ease.
TD's explanation, as relayed by spokeswoman Kelly Hechler, is that it's paying higher-than-normal costs to raise money to lend to clients. In hopes of improving conditions, the bank tried to hold off on raising rates on secured credit lines.
"Today, conditions in the marketplace haven't returned to normal and our cost to borrow funds remains at elevated levels, making it difficult to maintain the current interest rate," she wrote in an e-mail.
For an impartial view on what's going on in financial markets, let's check in with Brenda Lum, who as managing director for Canadian financial institutions at bond rater DBRS has the job of studying the banks and their business environment. Her view is that conditions are only somewhat better than they were for banks.
"We are in a better environment than we were back in the period around last October," she said. "But we are still seeing higher credit costs than we have seen historically."
Wondering if any banks are offering home equity credit lines at prime these days? I asked a few mortgage brokers and the consensus was that prime plus one point is the norm right now.
Another reason why TD customers are agitated is that interest rates on variable-rate mortgages are coming down. Whereas they might have cost prime plus one percentage point or more several months ago, one lender (ResMor Trust, which works through mortgage brokers) is offering variable-rate mortgages at prime and other lenders are just a tick above prime (see last Thursday's column for more details - go to http://tgam.ca/oY).
Moreover, some mortgage brokers believe variable-rate mortgages will fall below prime quite soon.
"We should see a prime minus product in 30 to 60 days," Vince Gaetano, vice-president at MonsterMortgage.ca, said in an e-mail.
Variable-rate mortgages are an entirely separate product than home equity lines of credit, so a decline in the former has no bearing on the latter.
Mr. Gaetano explained that credit lines are trickier for banks, in part because they have to be prepared for customers to draw down their maximum allowed amount, even if they in fact use only a fraction of what's available.
TD is trying to ease the sting of its rate increase by allowing clients to lock in all or part of their credit line into a fixed rate of interest at a discount of 1.25 percentage points off the posted rate. For example, you could lock into a one-year term at 2.50 per cent, which compares with a posted rate of 3.75 per cent and a floating rate (as of Nov. 16) of 3.25 per cent.
This isn't a bad offer, although it may not appeal to people who like the way secured lines of credit allow you to pay just the interest you owe every month rather than a structured mix of principal and interest. If you go for a locked-in rate in your credit line, that's what you'll be making.
This brings us back to the question of whether TD deserves credit for holding off on raising rates on secured lines of credit rate, or criticism for making a move at a time when things look much better in the financial world.
Let's give TD some credit - a crumb, anyway. All major banks are doing secured credit lines at prime plus one and TD's delay in joining the club suggests it really was trying to do right by its customers. Now, it's doing right by its shareholders.