Tip #9:  Use a Line of Credit Mortgage

These types of mortgages are the easiest to pay down and can offer you the most flexibility. They are designed to allow the mortgage holder the ability to pay down his mortgage without penalty with an adjustable or variable interest rate

With all the advantages there are also some risks. Certain types of budget-conscious people should avoid this type of mortgage due to lack of discipline. For whatever reason, if they have a credit line available they tend to always use it. Some people may go for months, or even years, and never touch their Line of Credit, and then suddenly, they may have an urge to get a new boat or go on that dream vacation.

Somehow this type of consumer will always find a way or reason to use the Line of Credit. This means the mortgage will never be repaid. This is not what the Line of Credit Mortgage was designed for, at least from the consumer’s standpoint. People with good credit management skills can use this type of mortgage to great advantage. They must be very careful about when and how they use the available credit.  

“How does a Line of Credit mortgage work?”

Most Line of Credit mortgages are based on the value of your home. The usual Line of Credit mortgage will be based on a LTV (Loan to Value) ratio of 65.00%. What does that last sentence mean in English?

There are a few definitions of LTV but the easiest to understand would be the following: Loan to Value means how much of your property value is mortgaged or owed to the bank. Using the same $100,000 home, if you have a LTV of 65.00% then you would have a mortgage of $65,000. If your LTV is 60% then you have a mortgage of $60,000.

Using the standard $100,000 home and the usual 65% Line of Credit, you would have a credit line of $65,000. Lines of Credit usually have an interest only payment feature. This means you must make a minimum payment of 1/12 of the annual interest each month.

If your interest rate is 6.00% annually, that means your interest payment based on semi-annual compounding would be $3900.00 or a monthly payment of $325.00. This would be the minimum monthly payment you need to make. All monies paid over and above this minimum amount would be credited towards your principle balance on the Line of Credit, and is usually compounded monthly.

“Now I know the fundamentals; how will this benefit me?”

By now you have already put two-and-two together; if you can pay any amount above the minimum payment every month…you will pay off your mortgage sooner. The key factor is that you continue to pay down as much of the principle balance as possible. The problem is that we tend to always need money for one thing or another.

You need to have discipline and good financial planning skills to use this type of mortgage. There are a couple of other mortgage options that allow similar pre-payment flexibility, but this one is the best. It has a built in escape clause; you can always access the equity in your home with a simple click of a button or signature on a cheque.

If you are privy to a great investment opportunity you can take advantage of it by simply writing a cheque or transferring money to another account. If you have a family emergency you have access to money with little interference from anyone.

As of the writing of this book, there are now 3 “BIG FIVE” banks that offer Line of Credit mortgages, of which two offer Line of Credit access over the Internet. The future will have all banks offering 24/7 access to your money such as account balances, paying bills, buying stocks, bonds, and giving yourself a mortgage any time you can access a computer. What will they offer next?

“How easily can I get one of these mortgages?”

Once again, just pick up your phone and call your bank. Better yet, call your mortgage broker and let him or her arrange it for you! The final chapter explains exactly how a mortgage broker can help you save those thousands of dollars. Essentially, once you have 35.00% equity in your home, you can access that equity any time you want with this type of mortgage.

NOTE: There are a couple of lenders willing to do Lines of Credit of up to 80.00%

There are two main types of Line of Credit mortgages: the first type is the straight line of credit mortgage where the whole mortgage is based on 65.00% LTV on your home, meaning that you can access this equity anytime you want. You simply write a cheque or transfer the funds to a different account. You then make your minimum monthly interest payment and any principle payment you want. The bigger the principle portion, the faster you will eventually pay off this mortgage.

This is the standard Line of Credit Mortgage. In recent years, the banks have added a twist to this type of mortgage to make it more attractive to everyone. Banks will now allow you to have a portion of the Line of Credit remain as a fixed-term mortgage. This is just like the type of mortgage you likely have now; the interest is fixed for a specific period of months or years.

“How does this benefit me?”

By putting a portion of your Line of Credit into a fixed-term you are guaranteeing a locked-in interest rate and payment portion. This will ensure that your mortgage will eventually be paid in the future. It will also still give you a set limit to your Line of Credit. People who are on tight budgets need to have set limits to help them better manage their money.

Another benefit of this type of mortgage is that when rates go up you have a lower fixed-rate on a portion of your mortgage. The fluctuating part moves with the prime interest rate since this is the Line of Credit portion.

In the long run, it is your decision as to which type of Line of Credit Mortgage will best suit you, or even if this type of mortgage is something that you would like. You must carefully evaluate your budgeting abilities before switching to this type of mortgage. You are at risk of interest rates moving up or down with little notice.

There is an escape clause built into most of these mortgages. It is a standard feature that allows you to move out of a variable or Line of Credit Mortgage. You can request to move to a fixed-term mortgage of whatever term is left on your current mortgage. Some institutions state that you can choose any term from 2 to 10 years into which you can return. This is a very important clause that you must have in any Line of Credit or variable-rate mortgage. DO NOT SIGN WITHOUT THIS FEATURE!

Let me stress this fact one more time; you should never sign on a Line of Credit or variable-rate mortgage that doesn’t allow you the option to switch out at anytime you like. Most institutions will allow you to switch to whatever the interest rate is for the fixed-term based on the day you apply for your new fixed term mortgage. They call this their POSTED RATE. When you read the last chapter you will see what this term means and how it will prompt you to run from anyone offering POSTED RATES.

You may have noticed that I have spent a substantial amount of space on this Tip. The reason is because of its flexibility and benefits. If used properly, this type of mortgage can allow you the ability to be your own bank…meaning that you would never need to apply for another loan or mortgage again. You could completely pay off your house and still have this type of arrangement in place in case of emergencies.

Daryl Marsden
P: 403-605-5711
daryl@maxmort.ca

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