Lines of credit(LOC) are popular products pushed by the banks because they can earn better interest for the bank than variable rate mortgages and human nature being what it is, people have difficulty paying them down. Most new clients are unaware their LOC may be secured against their home as a mortgage. The positive side of LOC’s is that they ‘revolve’, which means as you pay it down, the difference between what you have used and what’s left is available to borrow again and again. People like the flexibility of being able to borrow and not have to go through an approval process over and over. And there is no penalty for paying them out. If you are in the market for a line of credit we have better rates than the bank branches right now with one of our lender’s offering only .25% above prime(we deal with 47 including all the major banks, non banks and credit unions). So it’s easy to switch you out of your LOC and into one at a lower rate.
Personally, we are not big fans of LOC’s because people are forever in the ‘banks clutches’. We call them sleeping lions because one day you wake up and realize you’ve chewed through all the available limit. The more sinister side of LOC’s is that they give you additional purchase power, and make you ‘feel’ like you have more income than you do. They allow you to spend recklessly all on credit.
Doris had been paying on her LOC for several years trying desperately to pay it off. She was making weekly payments but every time she picked up a statement she couldn’t figure out why the balance was not going down. She came to us armed with her LOC statement. We determined that her ‘regular’ payment was actually not covering the interest(a little bank trick used when there is excess room on the line. We also saw that she had also signed on for a big life insurance premium on the outstanding balance. With all kinds of equity in her home, this made no sense at all especially when she was trying to pay off her house prior to her retirement. That money would be better spent paying down her mortgage. When we pointed this out to her, she said “I am so done with the bank.” And she too did not know that her LOC was registered as a first mortgage on her house.
Doris wanted to tell her story to educate others and she added “I wish I had called you guys sooner.” We were able to get her .7 below prime on a 10 year mortgage. Doris is adamant on getting the mortgage finished before she and her husband Nick retire, now she can have the mortgage paid off taking advantage of the 20 per cent pre-payment privileges on the new mortgage we found for her. If you need help with your situation, drop in to our Fergus office across from the old high school or give us a call. We are always ready to help.