navk13

Guys,
I have a question.
In canadian banks, they use different terminologies for loans. I see they use "Line of credit " what is this ? what is the difference between line of credit and simple mortgage?
I presume if the loan is more than one, then it is line of credit.... i am not sure. I would appreciate the Guys who are PR's/ Citizens can shed some light on it. Thanks

ann m

Can a moderator move this to the main Canada forum please? - I suspect it may get missed here on the immigration section ....

For what it's worth, I understand a line of credit to be a bit like a pre-approved loan. An imaginary pot of money sits there - pre-approved - and if you need to spend, then you go out and spend it - without having to refer back to the bank again. And once you've spent some of that money, then it attracts (a higher rate of) interest until you pay it down, or re-finance it some other way, ie, a new/another mortgage for example.

Think of buying a house and having a $180,000 mortgage. And then you may also have a line of credit from your bank for $100,000 (This would all be based on the value of your home and equity, etc - and the bank are not allowed to 'take' above a certain percentage of your equity in a line of credit as I understand it).

Then you see/need/want a new kitchen or a new roof - or a new car - or a holiday in the Maldives. You can use the funds behind the line of credit to splash out. Obviously you now owe more money - but you pay it back in a way you see fit. If it's a substantial sum which will take years to pay off, you would want to convert it to some other method attracting a lower rate of interest.

Clear as mud? Good

RayS

Line of credit = approved overdraft?

RayS

navk13

Thanx ann.

Let me understand more.

1)Through line of credit i will have preapproved credit. Do we know the amount of pre approved credit?

2)Out of this pre approved credit, let's assume i take 180,000 towards buying home. Does it attract higher rate of intrest than simple mortgage?

3)Assume that i need another loan for my business through line of credit. The mount of loan is based on my house loan or asset ? Is the intrest is different than house loan? Tennure of loan repayment?

4) As a whole am i allowed to take business loan separately with out line of credit ? or with out commiting myself to house loan?

In general is it advisable to have line of credit? what are the advantages and drawbacks?

Thanks in advance

jwsadler

Hi,

We have an account with TD Canada Trust looking at their website they have a page that describes a line of credit...

http://www.tdcanadatrust.com/lending/lineofcredit.jsp

Or a home-equity line of credit:

http://www.tdcanadatrust.com/mortgages/home_equity.jsp

Hope that helps....

regards,

James

Spoons1961

I think line of credit means interest only. We were in Canada in June and saw a house we liked and asked if we could get an interest only mortgage. Was told yes but it is called a line of credit and a 35% deposit needed.

cornmatthew

A line of credit is a revolving credit account. If you have a credit card, you know the idea. You have a set credit limit that you're not permitted to exceed. Every month, you're charged interest, and every month, you must pay back a minimum amount. Typically this minimum amount is equal to the interest charged. Although you *can* treat the line of credit as an interest-only loan, you'll want to pay more than the minimum so that you reduce the balance owing over time.

For a line of credit secured on your home, the credit limit will be a percentage of your home's value. The maximum offered to you will range from about 65% to 95% depending on how the bank rates you as a borrower. New immigrants with no Canadian credit record often find themselves at the lower end of that scale.
A line of credit generally attracts a slightly higher rate of interest than a regular mortgage. You're paying for the extra flexibility. Also, a line of credit carries a variable interest rate, while many (not all) mortgages are fixed. Historically, variable rates have been cheaper in the long run, most of the time. On the other hand, they expose you to risk.
Compared to a standard mortgage, the main point in favour is extreme flexibility. You can pay your mortgage back as quickly as you're able and borrow the money again if you need to later.

It's a great option if you want to pay off your mortgage quickly, but don't want to commit to enormous repayments for the whole term of the loan.

Since you can borrow the money back easily, you don't need to keep as much sitting around in a savings account, so you can afford to pay the mortgage down more aggressively than you'd be able to otherwise.

There are disadvantages. One is the slightly higher interest rate. The variable rate may be an advantage or disadvantage to you; it depends how much risk you can afford.

The flexibility can be a problem for some people, too. Since you only *have* to pay the interest, you need to make yourself pay off the capital. Nobody else will make you. Well, the bank will eventually, but by then you're in trouble.

navk13

.

Thanks a lot !

Very clear and prcise.

I would appreciate answers to some more questions.

The situation is like this:

a) I have let's say 150 k - 200 k in my account.
b) I apply for line of credit.
c) I take some loan ( use line of credit ) to buy a house. I use 60 % of line of credit.
d) 40% amount is balance in my line of credit after using for house.
e) I intend to start a business.
f) This 40 % amount is not suffiecient to start my business.

My questions :

1) How much line of credit can i expect? (Need not be precise.)
2) The balance 40 % in line of credit is not suffiecient for me to start my business.
3) What options i have to start my business? The bank says i have to gofor line of credit and buy a house and showing the property as security i can get more money to start business. This was the case with TD Bank.
4) Business development bank can help for starting a business, but for new immigrants, i am not sure what conditions will be there to borrow ( Assuming that i have 150k - 200 k in my a/c )
5) SHould i go for TD bank and use line of credit ?

6)Or should i approach business development bank where i can get separate loan for business, and approach TD Bank for mortgage for house?

Thanx in advance

R I C H

Here's my experience of starting a business here - perhaps it'll help clarify what's possible for you.

RBC initially lent me $250k to help fund the purchase of property/business premises. The loan to value ratio was c40%. Interest rate was prime +1% (variable).

I was offered a $50k credit (operating) line. The interest rate was the same as the commercial mortgage. During the first 4mths of operating, the credit line provided me with income to live off until the business was supporting itself.

Over time I wanted to build a house. RBC lent me an additional $250k. My loan to value ratio after building the house on the same property is now c20%.

RBC don't require any particular amount of the credit line to be paid back each month, should I choose to use it. I have a yearly review with my account manager to determine whether the facility is still appropriate for my business needs.

Yoong

http://www.google.ca/search?sourceid...smith+maneuver
To understand the Canadian Home Equity Loan,I would suggest that you
read the book called Smith Maneuver which you can purchase from the
website or borrow from the library.

I use the home equity line of credit from TD to purchase dividend stocks
and interest paying investments inorder to deduct the loan interest from my income tax.The interest rate that Iam paying is at prime rate and I let it
float for now.I have been using HELOC since 2001 , I find it flexible
and easy to control.

All I can say is that when you set up your 1st mortgage and the home equity
line of credit with a bank.Negotiate for free appraisal ,legal fees and better
interest rate.
Good luck.
Yoong

johnh009

My PC account calls it a "Low Cost Borrowing Account". For me, if it is not leaned against my mortgage I can have 10K, with a lean against my home/mortgage, I can have 100K.

johnh009

This may have worked in the past but what happens if the dividend stocks go down (like Washington Mutual, Bear Sterns, Bank of America, Microsoft, Corning, Leahman Bros. etc.)? Who takes the hit? Washington Mutual dropped from $60 to 16 cents in less than 1 year. This will surely negate any gains?

Canada is only marginally behind the US in the economic cycle. Canadians have more household debt than the Yanks.

Looks like Karl Marx was correct: "greed will destroy capitalism".

cneldred

You are even more leveraged than the banks that are currently doing their conkers on sub prime lending!!!

Yoong

I suppose the investors will take the hit,you snooze ,you lose.
Should be liquidated when the stocks start dropping.
I only have CDN banks and I am already in the sideline
watching either to liquidate or do bottom fishing.

There are other companies that pay dividends like Transcanada
Pipelines,utility stocks,oil and gas income trusts and REITs.
Gold Corp. etc.

navk13

.

Rich,

Thank you for your wondeful piece of info.

A few clarifciatons:

1) RBC when they approved the first commercial loan, i see your share was 60% and loan share 40%. and + line of credit 50k. Any colateral security was asked for this loan? or is it purely business loan?

2) Home loan 250k. How long you had to wait for this after taking commercial loan? I guess your home was mortgaged against this loan.

Thanks