Line of Credit: Good or Bad?

There are vast arrays of financial products available for you, the most common being the line of credit (LOC).  Like most things it is neither good nor bad, but it does heavily rely on the individuals’ situation. The two options available, the Home Equity LOC and the unsecured LOC, can be great choices depending on the status of your other finances and spending habits.

A Home Equity LOC is actually a type of mortgage in which your lender takes the time to assess your home’s value followed by a lawyer registering the LOC against you home through the Alberta title system. The only real distinction is the various percentages of your home’s value for the mortgage that different lenders are able to offer. Recent government policy changes have made it possible for most lenders to offer 65%, whereas local credit unions are still able to offer up to 80%. The greatest benefit of this LOC mortgage is that it allows for great flexibility. This LOC allows for payments to be made at any pace you prefer, access the funds again if you suddenly need a loan for any purpose, and make interest only payments with the potential to benefit your overall cash flow. Though all this sounds wonderful, there is a lot of responsibility that comes with this flexibility. Interest only payments can be helpful once in a while, but if you get into a habit of making only that payment then you’ll always owe the original amount and never pay down your mortgage. If you are able to exercise caution and only use this LOCs benefits once in a while it can be a great option to have those benefits available to you for larger purchases or an emergency fund.

An unsecured LOC product is obtained by visiting you bank and having them consider you based on your credit history. If you have strong enough credit to qualify, you are still able to use the funds for any purpose. The benefits of the LOC being unsecured is that the interest rate is often better than fees associated with credit cards, making it great for large expenses. Some lenders will even allow you to use the LOC for the down payment on your new home, but again it does have the potential to work against you.  You must be disciplined enough to repay more than the interest only payments the lender will require by setting your repayment amount to at least 3% of the balance. This means you will have to calculate 3% as the monthly payment and carry a higher balance when qualifying you for a mortgage, which could hinder your home buying process.

As we said, LOCs are neither good nor bad depending on your needs. They can be a wonderful mortgage option and I great way to cover some large expenses as long as you are able to discipline yourself and only use the benefits when you really need them, as well as pay an appropriate amount into the LOC each month. If you have any questions about LOCs or would like to apply for one yourself, contact your mortgage professional or AC Lending Group today!