Isn't it wonderful when your bank suggests and offers you a large "unsecured" Line Of Credit?
Doesn't it feel great being approved for $10,000 to $30,000 to use anyway you wish, no longer having to run to your bank each time you need to borrow a few thousand dollars? Now you can just write a cheque and it will go against your Line Of Credit, and you ONLY HAVE TO PAY THE INTEREST each month...How great is that?
Well, it is NOT GREAT when it comes time to applying and qualifying for a mortgage, as Federal lending guidelines (CMHC) stipulate that ALL mortgage lenders must use a minimum of 3% of the outstanding balance of your unsecured Lines Of Credit, Credit Cards etc
So lets say you have used up that $30,000 Line Of Credit your bank so kindly provided to you, and you get by comfortably because you only have to pay the "interest" each month (approx $175 per month assuming a 7% interest rate) EXCEPT....that actually equates to a $900 per month payment that MUST BE USED when getting approved for a mortgage!
So that $725 per month difference between what you actually have to pay on your Line Of Credit each month, and what we as mortgage lenders must use when qualifying you for a mortgage actually reduces the mortgage you might qualify for by approx. $150,000.00 !!!! (assuming 25 year amortization and 2.99% mortgage rate)
So, when your bank suggests that you should have a large Unsecured Line Of Credit please say "NO THANK YOU!" , especially if you have ANY plans to buy a home, or
A Line Of Credit is an "anchor" product...it keeps you the client chained to that financial institution. Statistics show that the majority of people simply make the minimum payments each month on a lines of credit, which provides the bank with a steady stream of interest income each month. When your bank approves you for that "Unsecured Line Of Credit" they will caBeing considered a When you get approved for that Line Of Credit banks can qualify you because as Canadians we are an honest bunch and rarely default on our debts
With 27 years of direct mortgage lending experience, first with a major bank, then a local credit union and now as a Mortgage Broker, I have arranged mortgages on almost every type of property imaginable....even a 50+ ft fishing trawler!!