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moneysense.ca, 22/01/09
Quick Tip: Get a Secured Line of Credit
With economic conditions worsening, the best thing to have is an emergency fund that is liquid and can be accessed easily. But the reality is that not everyone is diligent with their finances. For those who have a lot of equity built in their home but are cash-poor, it may make sense to obtain a secured line of credit while they are still employed. The line of credit should only be used in a strict emergency when cash is running low and obtaining one should not be used as a substitute for building a rainy day fund. Banks used to offer secured lines of credit at prime but these days prime plus 1% is typical. There may be fees involved in setting up a line of credit and discharge fees to close it. Note that tapping a secured line of credit in an emergency is not without risk — typically these loans are callable at any time.
moneysense.ca, 22/01/09
I have been wondering about replacing our thus-far-unused unsecured line of credit with a secured one. The $100 fee to set it up did throw me off the hunt however, and we have a reasonable sized and growing emergency cash fund. I assume that, while both types are callable, the bank would be more likely to call the unsecured LOC, thus a better product to have in the event of financial distress. At this point, I’m still not seeing a reason to switch, given the fact that we do have some cash.
Insights anyone?
Correction: I assume that, while both types are callable, the bank would be more likely to call the unsecured LOC, thus making the secured LOC a better product to have in the event of financial distress.
Ben: I would imagine banks won’t call either credit line unless they are in extreme distress. It is more likely that the rate on the LOC might increase as BMO seems to have done. When I obtained a SLOC years ago, the bank waived the fees, so it was easy to go with a SLOC, which has a lower interest rate. Still, this is just a guess; I’m really not sure if an unsecured LOC is more likely to be callable than a secured one.
“Banks used to offer secured lines of credit at prime but these days prime plus 1% is typical.”
If one was fortunate enough to get one of these lines in place at prime, does that rate still apply, or have they all gone to P+1?
Also a useful weapon against fraud in an obtuse way. If you have paid your house off and have no mortgage on it, having a secured line of credit on it, cuts down the amount of loan a scam artist can get on your home as well (should they steal your identity).
Obtuse but an interesting point.
C8j
I too would be interested in what rates are available for a SLOC or if Prime +1% is what we would have to settle for. Perhaps that is an idea for a post, CC. A comparison of rates available today at the major financial institutions.
My bank manager told me, just after the rules were changed, that all SLOC that were issued when the banks offered them at prime will have there rate “grandfathered”.
All new SLOCs will be based on prime+1.
I’m with TD but I assume all banks would follow the same formula.
So dumb question, but what exactly is the difference between an unsecured and secured line of credit? I get it from the creditor’s point of view (if I don’t pay an unsecured it’s harder for them to get their money) but what’s the advantage to me? Lower interest rate? Can’t cancel or call a secured loan?
Novice, the main difference is a lower rate with the secured since, obviously, its secured using your house as collateral. I don’t know about the callable/non-callable aspect.
[...] Canadian Capitalist suggests you may want to consider a secured line of credit now… just in case. [...]
I’ve had a secured line of credit for years and that’s what I used in the past to make leveraged investments. Since the spring of 2008, I sold off enough investments to completely pay it off. So, luckily I went into this market downturn with my “powder dry” so to speak, with zero leverage.
On the one hand, I didn’t like the way the market was going with the irrational exuberance, but in reality, it was more like having a horseshoe up me arse!
For the bank, it looks like they offer you a lower rate on SLOC, because of lower risk of loan default (first in line at the beach to collect your flotsam and jetsam when your ship goes down).
For the consumer, they get a lower rate but have to pay a setup fee. If I can get the bank to waive the setup fee, then I don’t see a reason not to transition my LOC to SLOC.
Novice: Secured LOCs are cheaper, typically by about 2%. All LOCs (as far as I’m aware) are callable.
Ben: Since SLOCs are like a second mortgage, when you want to cancel it, there is a “discharge fee”. I’m not sure if every bank charges this but RBC does (since last year). The fee, IIRC, is $250.
I was going to see about getting a SLOC next week. I had one before, and it worked great instead of a mortgage, as our income had quite a few ups and downs (contract working and a wife that kept getting prego
).
A friend had a SLOC a few years ago for Prime – 1%, boy I wish I could get that, mine was Prime…. and now it is looking like I will be getting Prime +1. (is it even possible to get prime these days?)
I intend to use it to help reduce the interest I am paying on my morgage. I can make additional payments on my morgage up to 15% or the original loan. I have 3.5 more years left locked in at 5.49%, so if I can get a SLOC @ 4% I can save 1.5% on 15% in the first year.
example) starting Mortgage @ 200K
after transfer (to make it easier, I am going to say that no principle is payed down)
year 1
Mort = 170k LOC = 30K (int 170*5.49% + 30*4% or 9.3k + 1.2 = 10.5 vs 200*5.49% = 10.98 K) save $480
year 2 (this is where it starts to get better)
Mort = 140k LOC = 60K (int 140*5.49% + 60*4% or 7.7k + 2.4 = 10.1 vs 200*5.49% = 10.98 K) save $880
year 3 (this is where it starts to get better and better)
Mort = 110k LOC = 90K (int 110*5.49% + 90*4% or 6.0k + 3.6 = 9.6 vs 200*5.49% = 10.98 K) save $1,380
Please feel free to tear my scheeme apart
etc
it gets even better when you actually pay down the mortgage as well
A further note to Xander’s comment, #7. Make sure that your contract for your secured LOC (or home equity LOC, is truly based on the prime rate. I luckily secured a HELOC in mid 2008 at prime. A friend of mine also obtained a HELOC at that time, which he thought was at prime. Since then, his HELOC been changed to prime + 1. My contract for the HELOC specifies prime, so it can not be changed (similar to being “grandfathered).
Joel, yes the HELOC can be used to reduce the interest on your mortgage. Our mortgage (first) is a fixed term of ten years at 5.0%. Our HELOC (second) is at prime, currently 3.0%. We have the opportunity to prepay 20% of principal each year, and will likely use the HELOC for this purpose to save interest.
I would suggest not putting too much of the principal on your HELOC when doing this, in case interest rates spike back up and you are left paying more interest than you would on your regular mortgage. I think we will transfer an amount to the HELOC that we will be able to pay off within a fairly short duration of time (i.e. one to two years).
Just remember, it is likely easier to transfer principal from primary mortgage to HELOC than it is to transfer it back again.
And to chime in the discussion what do I get today in mail?
A letter from TD letting me know of a few changes on my unsecured line of credit. The cost of borrowing going up by 0.5% meaning it will be prime + 5% and the introduction of an inactivity fee of… 35$ if not used at all for 360 days.
Anybody else with unsecured lines received this? Personally I have not used the LOC considering the interest is too high for my tastes and especially that I didn’t need it and hoping to reach a larger amount (currently 14K I know that once over 20K the interest drops probably prime + 4%). As I do not have a house to secure it against I am stuck with this one.
I do not plan on closing it because for some time to come I think it will be relatively hard to get them again. So I will probably do a small transcation between it and the chequing account just to keep it alive.
Remus,
I have a line of credit (non-secured) at RBC. It’s prime + 1.5%. I don’t need it at the moment (and so far have not), so like you, have never used it. I was quite interested to see your post and will be watching out to see if I receive a similar notice from RBC. All I can say is they’d better think twice before imposing any inactivity fee! I do have quite a bit in assets with them so do have some leverage. (A friend, when he heard about the details of my LOC said “You must have a LOT of money with the Royal Bank!”)
Rob,
In my relative short experience with Canadian banks (I only moved here in 2006) all I can say is that I find TD Bank to be one of the most conservatives bank. While this is great news if you have TD stocks or are worried about a bank not being run as it should be, it is surely not very helpful when you are “small” and need their favors
I have not been met with so much conservatorism in my life.
So judging from your example I can join your friend’s club and tell you: You indeed have a very very good deal with RBC. Everyone I know that has a TD account and an unsecured LOC with them has prime + 4% at best (this when you reach the upper scale limits which normally are around 25k for an unsecured LOC at TD). The Prime + 1.5% at TD is an area reserved for their secured LOC from what I saw… or maybe for customers with lots of money… who don’t need the LOC in the first place and can afford to pay the 35$ dormant fee
I also know for a fact that Scotia Bank is similar to RBC, as I know someone with unsecured LOC for Prime + 1.5%.
At TD this remains a wonderful dream. I would be very curious if anyone else in here dealing with TD have them for less.
The fee to set up a secured line of credit is usually for an appraisal of the value of the property.
When you buy a house/condo and are taking out a mortage there is also an appraisal fee. So when buying a house one should think ahead and take out the secured line of credit at the same time , with the same bank, and you will pay only one appraisal fee. You do not need to use the line of credit right away, but will have it if and when you do need to call on it.
I have had a secured line of credit with Scotiabank for many years. With the recent interest rate reductions the interest rate on my Scotiabank secured line of credit is now 4.0%. (Prime plus 1%) I have never been charged an inactivity fee.
[...] Capitalist believes people should obtain a line of credit for their house just in case of emergencies. While this makes a lot of sense in theory, I do not recommend it [...]
Remus,
My husband and I have a TD unsecured LOC at prime + 2.75% ($17k). We’ve had the LOC for about 5-6 years. I’ve called a couple times to see if I could get it reduced and they always told me we were lucky to have that rate. We use it as a chequing account (built in overdraft at no cost since we generally always have more than the limit of the LOC in the account) & we don’t have to worry about an inactivity fee (although I don’t recall getting that notice).
We do have another unsecured LOC with PC Financial at prime + 1.25% so we don’t feel inclined to move to a HELOC for the extra 1/4%.
I have a HELOC that I got in Sep 07 at prime and the maximum I can draw on it is about 20% of my house price (at the time they did the appraisal). The bank told me that it would never be called unless I failed to pay the interest. I’m not sure if I believe them though.
I just checked it and they are still charging me prime.
I’ve found PC Financial has the best secured LOC at prime plus 1%…has anyone found anything better yet? Also, how do u get the bank to waive the appraisal/setup fee? THanks in advance.
Nav: I believe prime + 1% is the best you can do for secured LOC these days. The waiver of appraisal / setup fees was common a couple of years back. I’d be surprised if it still was the case.
Hey, I have a secured line of Credit for 50,000 at P +1, on a paid off home. If its relatively easy to pay back the interest expense, would you guys recommend investing it? Thanks
If you have a very long time frame (the S&P index is flat over the last 10 years) and if losing it all won’t change your lifestyle one bit (because then you’ll have to not only pay the interest, but dip into your pocket to pay back the entire principal).
Remember, in order to write it off you have to show a direct line from borrowing the money to investing it (no personal use in between).
We currently have a house that was recently appraised at just over $400,000 and we owe just under $100,000 on it. We have a secured line of credit of $223,000 and are currently into it for $140,000 as we just purchased as cottage. My wife works contract and is counting on that SLOC still being there when she has to pay taxes in a couple months. Is there any chance CIBC would reduce this SLOC making it difficult for us to pay the income taxes?
Lines of Credit can also be set up in conjunction with getting a mortgage. Except for intrest-only mortgages, everytime borrowers pay their mortgages, part of each payment goes to principal paydown and the other part to interest cost and/or property tax. Certain lenders/banks offer mortgage products with a line of credit component attached to it. This makes it so that the amount paid down for principal each month is automatically added to the line of credit. The advantage being that you do not need to pay fees to set up additional line of credit or increase it’s amount.
In my opnion, in today’s market where interest rates are at all-time low, any borrower that benefits from refinancing to a lower rate should get this type of mortgage if they are qualified for it.
I wish I knew of the pricing for service fees earlier. i got charged almost $900 for opening up a secured line of credit with HSBC, less than a month ago. I got told by some people that HSBC will use their relationship with long term customers to charge additional fees to customers that don’t shop around beforehand. So stupid me, I thought my banker was doing what was best for me. I found out later, talked to the bank manager, and have gotten nowhere. So be careful!! HSBC is the worst.
I obtained a SLOC back in 2005. My registration documents state prime plus 0% interest. PC/CIBC is now charging me prime plus 1%…can they do this? I have read the agreement and it states that any changes in the terms of the agreement (interest) must be made in writing. PC cannot demand repayment of the amoutn secured, in whole or in part, unless an Event of Default has occurred.
Just got a letter from the National Bank of Canada. But first my background…currently owe 18K out of 22K – I have a PERFECT credit rating, two salaries combined earning over 100K/year. The letter states my credit is going from prime + 2.50% to PRIME + 4.50% effective August 15th!. Any strategies out there on negociating to lower it or shopping elsewhere? Boy am I pissed! I am ready to take all my business elsewhere.
ya im pretty discusted myself with my bank i got this sloc at prime plus 0% they were suposssed to grandfather the ones that got at prime plus 0 put they found out that instead of making 100 million in profit after the prime went down so much thet lost 10 million the government should get involved here i got the line of credit at prime it shoud stay that way this was three years ago the word fot it is greed pure and simple.
ive been with PC too and thought that i should be grandfathered but am now paying P+ 1%. i did get a letter in writing about the change. i wonder if they’ll change it back my mortgage is up fpr renewal?
I have a unused HELOC with Scotiabank for several years at prime plus 0%. Statement was sent 3 months ago advising me that rate going up to prime plus 1%.
I complained to branch manager and then a letter to Office of President arguing for Scotiabank to keep at the original terms of contract (prime plus 0%).
No flexibility on part of the bank, no grandfathered rates, “we understand consumers concerns but it’s a business decision”, hopefully we can get back your business in the future when I explained that my sizable assets are moving elsewhere.
I have a long memory, and there are many choices of where to invest my assets.
Lester, I too have just recieved the letter from TD on our our HELOC – we had prime + 0 and now have been notified about prime + 1 change. Is there not something in the contracts we sign that protect us from that? Because technically I signed a contract agreeing to prime +0%, 2.5 years ago, and unless I am signing another contract, is the bank not legally breaking our contract?
@Dawn: Sorry, the bank’s a** is well-covered. At least in one exemplar, there’s a clause 12, “Changing this Agreement”, which stipulates, in part:
“We may from time to time change the provisions of this Agreement by prior written notice to you, including changes to the Credit Limit or the rate of interest that we charge over the TD Prime Rate to arrive at the Variable Annual Interest Rate. [bla bla bla]”
Check your documentation carefully. Chances are you signed the same thing.
Question – asssuming the rate, principle, term, payments are all equal, what would be the advantage of moving the remaining balance on my mortgage to a LOC? I have about 50% equity in the house.
People are telling me with a LOC you will pay less interest, but I haven’t found anything that confirms this.
@Marc: I don’t think there is any except that typically only interest is owed on the SLOC. Since you don’t have to pay down principal, the cash flow could be lower. However, secured Lines of Credit are more expensive than a variable-rate mortgage. Typical SLOC’s these days are at Prime + 1%. You can get a variable-rate mortgage for Prime.
@Marc: If the interest rate on your LOC is higher than on your variable rate mortgage (which is likely because home equity LOC seem be all be “repriced” by the banks to Prime + 1%), then stick with the mortgage at Prime rate. Its not collusion just coincidence.
LOC’s are good in that you only need to pay the interest portion of your loan whereas a traditional mortgage is a blended payment of the interest owed plus a little bit extra to pay down the principal owed. Its a good thing to pay down the principal in that you eventually are debt free.
I too have a secured line of credit with TD. I received the letter stated it is increasing to prime + 1 %. I phoned and they said there is not anything they can do.
I then phoned RBC bank and there rates are prime + 0.9%. They will cover all expenses for changing banks.
I am changing. Just the principal of the thing. The big banks are not losing any money. They are being greedy. Just when the little guy is getting a break in the payments he has to make, they decide that it has lasted long enough, and hike up their rate.
I am sure when the rates return to “normal” they won’t lower our rates back down to prime.
IS THIS NOT SOMETHING -ITS A TRUE STATEMENT IF THE PRIME WENT UP TO 7 PERSENT OR HIGHER YOU THINK THEY WOULD GIVE US A BREAK LIKE PRIME MINUS-1-THAT WOULD BE THE DAY -COMPLETE GREED THATS ALL IT IS.
I did an internet search on interest rates and came across a site that will send you an email to print and mail in to your mp or they give you the email address of
your local mp. It is a very well written letter, and calls for the government to take action. I encourage all of you to check it out. A search for “say no to banks” should come up with the site.
I read that RBC has lowered their secured load 0.5% to prime +0.5%. Can anyone confirm?
Residential mortgage rates may have risen in recent weeks, but Canada’s largest bank is dropping interest rates on another wildly popular consumer loan.
Royal Bank of Canada says it plans to reduce the rate on its “RBC Homeline Plan” line of credit by 0.40 per cent to 2.75 per cent, effective Thursday. The new interest rate is the equivalent of the bank’s prime rate plus 0.50 per cent.
More to read if you go there.
from thestar.com
Yes. I saw an ad by RBC in the Globe and Mail. Its Prime plus 0.5%.
I just sent a letter to Scotiabank to see if they will match, otherwise I move my business.
I had a home visit from the RBC bank. She even brought me a coffee.
I have all the paper work done to change from the TD bank.
RBC, BMO and G & F Financial are currently offering prime+0.5% HELOC’s. CIBC is offering prime+1% and they are paying for legal costs as long as you keep a balance of $30,000 for 3 months. I’m trying to get RBC and BMO to cover legals costs but, have no luck so far. I’m not expecting appraisal costs because the LOC amount is less that 60% of the Provincially assessed value of my home.
Spoke to broker today and the best he could offer was free legal and appraisal but, the rate was prime+0.85%
Ian, where did you find BMO’s prime +0.5%? RBC is advertising the new lower rate, but I haven’t found any other competing ads. Even PC Financial is prime +1%. Does one need to negotiate the low rate with BMO or is there for anyone? And what should we expect in fees to set up a new SLOC (i think that PC Financial is $150) thanks, Tom
I telephoned the BMO central number I got on the internet and they told me the rate was prime + 0.5%. I have been told that the legal costs are approx. $350 and there may be appraisal costs depending on the property value and the amount you want secured as a loan. In my case I won’t have an appraisal costs.
FYI
I’m probably going to use RBC which has the same rate because, from what I’ve read they may be less likely to increase the 0.5% at a later date.
good luck
Apparently there is a 10% discount on our home insurance if there is no mortgage on the house. Had to get a letter from the bank that we were mortgage free for insurance discounts. Scotia was unable to issue a letter to us because these was a LOC on the house,
Wanted to cancel LOC through our mortgage (secured) this morning and was told it will cost $275?!! I was upset since we paid off our mortgage last year from Scotia bank to learn that there was still a LOC on the house.
Saving $90 year on insurance vs $275 fee to cancel the LOC?? I know there are good points to have a secured LOC, but is it worth saving on the home insurance??
Thanks Jack, that was not something I had considered. I too, get a discount on my home insurance, no doubt they would take it away if I get a line o’ credit.
Hello–I was just wondering if you would have any quick advice. My husband and I after 35 years still find dealing with finances a thorn in our side but we do our best – We have owned our house for 20 years (well, the bank I mean) – We had it paid off approx 15 years ago but we took out another small mortgage as my husband wanted to operate a greenhouse business so we took on another mortgage which we just paid down to $14,000.00 – In the meantime in 2005 we had a 700 litre accidental oil spill on our property, for which the oil company took responsiblity for their error and we have just rec’d a settlement from that five years later, just a month or so ago. Of course it wasn’t what we had hoped for in a settlement considering what we lost (alot of customers, my husbands ill heath etc) – - We had hoped to use a significant amt of this money to pay down debt, and do repairs on our home. Anyway….we are in need of a newer car, some repairs on our 80′s house (windows etc.) and we need to consolidate some credit cards. We are having an RBC banking representative come to our home today to discuss Line of Credit versus mortgage–the line of credit would be a variable rate, she says, so that is a risk I suppose as bank rates are supposed to go up in Canada soon – I’m just not sure – we are looking at setting up a mortgage fo $50,000. At the same time the thought of a mortgage again makes me ill – After the accidental oil spill I have become very leary of money etc.(and worries of the unforeseen) – I know that this is the reality…I am a Med Transcriptionist who makes a fairly good income and my hsuband is a school bus driver so our incoming funds are not that high–we have a rental property apartment bringing in $450.00 a month – That would bring the payment down. I guess you are wondering what I am asking – I’m just wondering is it a wiser decision to go with a Line of Credit, versus a mortgage?
Thank you for listening!
C
Claudia,
Secured line of credit against your income property is the way to go.
The interest on this is a write off.
Borrow as much as you need to do all the things you need to do (be realistic here)
Kill the CC debt first with the SLOC money
Buy the car .. second hand..never new , fix up the house
One payment to make now by doing this..use any extra money to pay off the SLOC fast.
i have an apartment that has a 1st mortgage and a 2nd sloc. i now need to sell off the apartment for less than whats owed on the place. does anyone know if i can remove the sloc and make it unsecured or short the sloc
Can I switch my unsecured LOC to secured against about $300,000 in RSP in the same bank? (TD)
…sorry, continuing: LOC is for $15k…thanks.
@Joan: IIRC, you cannot use a RSP as a collateral for a loan.