Credit conditions have eased substantially since last fall but try telling that to the Canadian big banks. The banks are continuing to increase the interest rates on secured and unsecured lines of credit. On the Canadian Money Forum, one member reported that the interest on his existing secured line of credit with ScotiaBank is going up by 1%. Others had reported earlier that TD Bank, CIBC and PC Financial had jacked up their rates. I have a SLOC with Royal Bank and the interest rate has stayed at Prime but I wonder how long a few banks will remain holdouts. Our Credit Line Agreement clearly states that Royal Bank can change the terms of the agreement:

We may make changes to this Agreement at any time. If we do, we will let you know before the changes take effect. If your Royal Credit Line is used or any amounts remain unpaid after the effective date of a change, it will mean that you have agreed to the change.

If a bank decides to increase interest rates, there is little that customers can do. The agreements clearly state that the bank can decide to change the terms and threatening to take your business elsewhere is unlikely to have sway the bank: new lines of credit are at least equally expensive.

This article has 44 comments

  1. It seems sort of sleazy. While the terms are clearly spelled out (“we may make changes to this Agreement at any time”), if you have a significant balance owing on your LOC, you’re SOL. It’s essentially bait and switch.

    A fairer approach would be to peg rates to prime (or +1%, or -1% or whatever), and then raise/lower it in response to the bank’s needs. In other words, if bank margins get squeezed too thin, they should be raising prime to restore them, not rewriting existing agreements. The problem, from their perspective, is that they get skewered for monkeying around with prime, whereas they essentially get a free pass for screwing over LOC holders.

    • Canadian Capitalist

      Al: Actually banks have done that as well. They have increased the spread of the Prime rate over the Bank of Canada rate from 1.75% before the credit crisis to 2%. According to comments on the Forum, some have even increased it to 2.25%.

      Now, they are revising the rates on existing lines of credit by pleading that their borrowing costs have gone up. Reminder once again that it is better not to owe anyone a single red cent.

  2. Luckily they’re moving quickly to increase their rates on GICs and savings accounts too.

  3. @ CC – Absolutely; they only passed along a 0.25 percentage point cut when the Bank of Canada cut their rates by 0.50 of a percentage point a few announcements ago. That, IMHO, is less objectionable than rewriting contracts, even if they have the power to do so.

    It’s no secret why many people have problems with the way that banks operate. Some of it is undeserved (i.e. people complaining about IRD penalties), but some of it is absolutely deserved (i.e. this sort of stuff).

    Good not to owe anyone a single red cent, but even better to own Bank stock so you at least get a cut of the profits they generate from their shenanigans.

    • Canadian Capitalist

      @Al: Yes, rewriting existing contracts does appear sleazy. In fact, the first poster noted that they called it “renegotiated”. Not sure how an unilateral change counts as renegotiation! Agree with your comment on owning the banks. Yields have dropped but they are still north of 4.5%.

      Anyone know if BMO has engaged in “renegotiating” existing lines of credit? It seems like CIBC, TD and now Scotia Bank have. Royal Bank seems to be a holdout. Wonder if BMO is a holdout as well.

  4. This is yet one more reason why a LoC can’t be relied upon as an emergency fund. There’s no substitute for cold hard cash you’ve saved when there’s an emergency.

  5. Am I missing something? If you have a floating (interest rate) loan then the interest rate can change according to market rates no?

    If you want more certain terms then lock it in.

    • Canadian Capitalist

      @Mike: I think I should explain myself better. Let’s say you have a LOC agreement with your bank is at Prime plus 0%. Banks are now changing the agreement unilaterally to Prime plus 1%.

  6. “Am I missing something? If you have a floating (interest rate) loan then the interest rate can change according to market rates no?”

    Perhaps you are missing something. I have a line of credit at CIBC and the interest rate is calculated as prime + 3.25%. Until about a month ago it was prime + 2.25%. The big problem with this is that when the prime rate starts to move up, they keep that extra percentage point on top of it. What’s the purpose of lowering the prime rate if you just increase your cut on top of it?

  7. CC – yes, BMO has increased both their secured and unsecured LOC’s by 1% (at least they have for me). In fact, they have been attempting for months now to increase the spread on a variable rate secured business loan I have even though they are clearly not entitled to as per our loan contract. Only after egging them on to call the loan (which they are entitled to do) have they backed off…for now. Our business carries substantial monthly balances in trust and general bank accounts with BMO, but this clearly means nothing to them.

  8. I think banks can’t change the terms of variable rate mortgages. If this is true (I haven’t checked) it’s better to renegotiate the principal and use that cash instead of LOC.

  9. I called my local bank, Scotia, and they gave me the standard response to the HELOC rate increase in August, “other banks are doing it,…blah blah blah”. As consumers, what other effective ways can we do to protest? email to our bank’s head office, BoC, Jim Flaherty, media…etc?

  10. Ok, now I understand the issue.

    What a bunch of buggers!

  11. $omeyoungguy: Stop using their products. That’s it.

  12. Leading Edge Boomer

    Funny how we complain when the banks,insurance companies, oil companies, widget makers, do things to increase their profits, but we investors complain little when they raise their dividends. I wonder where we think that dividend money comes from?

    I bought their shares recently when the prices were low and the dividend yields high. They pay me a lot more than I pay them. I am sure there are other investors who come to this site who can also say the same.

  13. Maybe, yes, but when banks go to underhanded ways of breaking contracts to boost their profits, you can understand why people would be upset. I won’t start a debate on ethical investing, let’s face it, there are full on wars & people dying for oil companies.
    I’ve been reviewing my scotia agreement, there is no mention that they can do what they’re trying. “Changing the agreement: Changes may be made as long as your loan is not in default and we agree in writing”. Well, I haven’t agreed to a darn thing.

    As far as I can tell, they can’t make this change. The signed agreement binds me by the rules outlined in the paper as well as accompanying booklet. The booklet doesn’t give them a carte blanche, so I’m going to keep fighting this.

  14. Al, were you being sarcastic and I missed it when you said “Luckily they’re moving quickly to increase their rates on GICs and savings accounts too.” or are some of the banks actually increasing their rates on savings, and if so, which ones, cause PC Financial isn’t one of them so it’s getting near time to move the savings somewhere else.

  15. Hey Steve,

    Yes, sarcastic. I hadn’t even noticed how low rates had dropped until Wednesday, and then I saw this post from CC almost immediately after. I’m getting very close to moving my savings to a mattress (but it will be a new mattress.)

  16. Having banked with CIBC for several years, having a perfect history with them and a 5-star credit rating, so to speak, I was astonished when they sent notice of my secure line of credit increasing to Prime +1% from Prime. I called my lending officer. I called my bank manager. I called head office. I called anyone who would listen until I was finally told that the rate was raised for everyone, including employees. So I made good on my threat to leave them and took my business to the Royal Bank. Now the Royal Bank did not offer me a loan at Prime Rate, but did match Prime +1%, with no application fees or transfer fees to register the mortgage which secures the line of credit. They also told me that when they stopped offering loans at Prime, Rate, they did NOT retroactively change the terms of existing clients which impressed me. So, as a matter of principle, I switched over. The only lesson I’ve ever learned with banks is that no bank has ever been loyal to me, so why would I ever be loyal to a bank unless the relationship is reciprocal!

  17. P.S. If there is another lesson I’ve learned, it’s this. Banks are going to get their profit from you one way or another. If you lock in your rate, your paying higher than you would on a variable rate line of credit. That’s what I did, taking on the risk that it was subject to change with market conditions and my gamble seemed to pay off when the market started dropping. But NO… the banks didn’t like the way the game was playing in my favour, so they merely changed the rules. And now they are earning millions of dollars more, every day, even though they were posting some huge profits! The only way to win… is to pay off all non-income producing debt as soon as possible and live within your means!

  18. CORRECTION… in the above post, I did not mean that I had a locked in rate… it was actually a variable rate, and I took on the risk of rate changes. (yes, I am a rookie on reading and interacting with blogs!-SMILE)

  19. Canadian Capitalist

    @Troy: I can confirm that RBC did not increase the rate on an existing loan. It seems to be the only bank to be the holdout though their agreement clearly spells out that they have the right to.

    @Al: Even mattresses don’t seem to be safe! Check out this funny article 🙂
    http://cli.gs/ggQBt6

  20. Thanks for the update! Tells me I’m on the right track in switching loyalty from CIBC to the Royal Bank… if perhaps only for the moment until policies are changed! I can, however, say that the longest loyalty I’ve held with a bank is with President’s Choice Financial whom I’ve been with since they opened. Although they’ve downgraded some benefits, they still remain committed to no-fee banking and as such I remain committed to carrying a large balance with them.

  21. My interest on LOC is also going up. Since I owe a lot of money that is invested I’d suffer a big loss if I sold it and paid it off. I was thinking about 1.99% MBNA offer. I am getting checks in the mail. Does anybody have any experience with this? Is it too good to be true, because it certainly sounds so. Are there set-up charges, fees etc. Can I just move $50k to my LOC and after a year borrow from LOC again and pay up MBNA?
    Thanks.

  22. I’ve done the MBNA thing before, didn’t cost me any extra fees, i just paid it all off once the 6 month offer expired. That was about 5 years ago, so things may have changed since then.

  23. @CC. My HELOC at BMO is still at prime +1%, so it didn’t change. It hasn’t changed since I opened that HELOC many many years ago.

    @Al & @Steve. Actually GIC rates did go up a slight bit, but you have to look at competitive quotes for various institutions. Recently I bought GICs @ National Bank for 4% on a 5-yr term. A few weeks before that, the best deal you could get was about 3.5% for 5-yrs.

    Inside my RSP, I’m all about fixed income. I follow the debt market fairly closely for my RSP and own a wide variety of bonds, coupons and GICs of various durations.

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  27. cannon_fodder

    I have a Readiline mortgage at BMO. I just received my latest HELOC statement and the interest rate is still at 2.25% with nary a sign of them attempting to raise it beyond the bank’s prime lending rate. My mortgage is still at 1.5%, too.

  28. Well, I just received a letter from Royal Bank, dated July 8th: based on their annual review of “my” account, they are making some changes to “my” account, and increasing the interest rate on my L.O.C. by 1.87%, effective Sept. 1/09. (I will now be paying RBC Prime + 3.62% on any funds outstanding after Sept. 1). I guess they held out until they’d managed to attract as many outraged clients from other institutions as possible! I’ve been their customer for 36 years, but am considering switching to my local credit union.

    But then again, maybe they’re only “renegotiating” MY agreement…?!

    • Canadian Capitalist

      @Carolyn: I haven’t heard anything from RBC yet. 1.87% is a significant bump up in the interest rate. Sorry to hear that.

  29. I would really like to know how I could access or borrow from my locked in GIC before their maturity date. I’m a little upset, I’ve been to the bank to try and make arrangements wher I could change the maturity dates of my CIS/RRSP and was informed that I couldn’t. When I received a large sum of money I went to TD bank and asked for assistance on how to place my RRSPs. Not knowing or fully understanding all this migamarole I trusted my advisor with the assumption that this is still my money for me to change or place where I see fit when I see fit> Needless to say, I was told I can’t even borrow from any of them. I have 5 GICs not doing much for me and I’m in a financial binde where I may lose everything I own> Now you tell me how is this fair ? I can’t even borrow a measly 10.000 when I have over 50,000 sitting there with maturiy date going for another 5 yrs from now.

  30. Mitch, it’s completely fair. You were offered a product that locks in funds and you purchased it. Stop whining.

  31. Mitch,
    Either cash one out and lose the interest, or use the GIC as collateral for the loan. If it’s all in RSP, you’ll also have to pay the tax penalty for withdrawal.

    DAvid

  32. Canadian Capitalist

    @mitch: Sorry to hear about the bind you are in. When you buy a GIC, you are promised a interest rate and the ability to get back your principal after a certain term. Unfortunately, GICs may not be redeemable if you want your principal back before the term ends. Why don’t you talk with your advisor who sold you the GICs for the options you have?

  33. Scotiabank increased my line of cradit rate prime +1% which I had on prime. I asked about it and they said, Yes, they can change rate anytime they wants, so that mean they can advertise lower rate to get clients in and will increase the rate after few months. Banks have no principles at a all.

  34. It's all shady...

    I too received the Scotiabank notice that they are adding 1% to my LOC “to reflect increases to our cost of raising funds”.
    What does that mean? Are bigger salaries and bonuses for bank executives part of increasing costs?

    To add insult to injury “Scotiabank reports strong third quarter results of $931 million and ***record revenues*** for second consecutive quarter”

    http://finance.yahoo.com/news/Scotiabank-reports-strong-cnw-2797849026.html?x=0&.v=1

    Kind of strange to complain about not being able to raise funds, then rejoice for record revenues. Reminds me of that Shaky Lady “homeless” person in Toronto, who actually lived in an apartment with a leather furniture, big-screen-tv, computer…

    And remember there was a time when banks actually PAID YOU to hold your money (so that they could lend it out to others and make money from it)? Now they consider themselves as giving you a “service” and CHARGE you for holding your money.

  35. seems all the banks are the same, what’s new.
    BOC prime is .25%, bank prime is 2.00% over that and the banks are now going to bank prime +1% or 3.25%, if you’re paying more than that, you’re a higher risk or getting screwed. The banks will all share in the movement of disgruntled customers and come out the same. Maybe we should pick one bank to win and move all our business with it, maybe the biggest is best choice (RBC) what do you think? Might spur some competition instead of what looks like price fixing.

  36. What is profoundly offensive about this is they are hitting their most creditworthy customers who negotiated LOC’s and HELOC’s Prime (or Prime + 0%) with a new penality, a 1% increase in interest.

    The folks here and on other blogs that are annoyed are those this the most PRISTINE credit records and it is those who are being singled out by all Banks for the Prime +1% “penalty ”

    I “thought” we had a deal with Scotia bank, (BNS) that the HELOC was variable AT PRIME. (or the over night rate + 2% either way call it %2.25)
    now with no consultation they are unilaterally upping it to %3.25

    I am DISGUSTED that they are allowed to do this.

    -tom w

  37. Tom, you were the one that agreed to the terms. If the terms of the contract were unacceptable why did you borrow their money?

    Maybe if more people would refuse to borrow the money unless the variable rate differential was fixed then the product would change… of course then everyone would just get prime+1 instead, but the only way to help change this is to move your money to somewhere that will lock the differential. If you find one, post it here and make it public, other people will follow too.

  38. So Traciatim, tell us this… why is it ok with you for the banks to change the terms of our contract (because of the fine print) when increasing the rate, but when they drop their rates they are not applying the decrease?

    RBC dropped their rates to prime + 0.5% on their Homeline secured borrowing accounts but did not apply it to my account. I called, and it appears I will have to go through an application process all over again to make this happen and “fees may apply” which is funny because when they brought me over to them, they waived all fees, because my credit rating was excellent.

    Silly… but true… and they would risk losing my business gambling that I’m too lazy to go to the competition because the application process is annoying.

  39. They don’t change the terms, they are following the terms that you agreed to. Read it before signing it next time.

    If you are that upset about, find another lender to borrow from. It’s the only language they understand.

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