Thursday, May 5, 2011

Applying for a Personal Line of Credit

As a real estate investor it is always nice to have credit available to you. I've researched a couple personal line of credits(PLoC) at different banks. CIBC worked best for me because they are an interest only PLoC meaning I don't have to pay back the principal until I'm good and ready. TD Bank had a forced schedule of repayment that didn't gel well with me. (Not enough flexibility)

From what I understand a PLoC cannot be used as a proof of down payment since then technically you are borrowing more than the allowed on top of your mortgage. (Could even be up to 100% in some cases). Talking to my mortgage broker though it sounds like as long as you actually can show you have the cash or investments available as a proof of down payment you can still use the PLoC for the actual down payment. Say you don't want to cash in your stocks or TFSA for the down payment of your next property, but you can easily show that you have the money available... then you can use the PLoC to do the down payment and just pay the interest as you go and not have to upend your investment portfolio.

An interesting positive to a PLoC is IF you borrow your max and for some reason later on the bank wants to decrease your credit... at least you can just keep paying the interest and it won't be a squeeze to your cash stores (I mean they can't decrease it more than you already owe... but as you pay it off they can decrease it down to what you owe). That sounded confusing. An example might help. Say you had a limit of $25,000... you borrow the $25,000... say later on you lose your job... but your investment properties easily cashflow to cover all your loans... but based on the banks assessment you are more risky and wouldn't qualify for the $25,000 PLoC... the worst that can happen is you just keep paying interest on the $25,000 but don't ever pay it back... but say you do pay back $5000 of the principal... they may decrease your limit to what you still owe ($20,000). Anyways just a small perk.

Back to my experience applying for the actual PLoC. I had an appointment with my banker and she requested my most recent two pay stubs. Thing is that wasn't all she required. Luckily I had brought my "Sophisticated Investor Binder". (Those who have read Don Campbell's book on the ACRE System will be familiar with this). She asked for fairly detailed accounts of my assets:

- Balances on RRSP, TFSA, Margin trading accounts
- Each of my bank accounts (not just a summary of all the cash you have available)
- Investment property information (Mortgage payments, rent, taxes)
- Worth of my personal car (guess they also count that as an asset)

I thought it was rather interesting anyways. She did compliment me on being organized and having it ready. (Even though she only told me to bring two pay stubs...)

I was automatically approved for a $35,000 credit limit at Prime + 3%... but if I had a a limit of $50,001 the interest goes to Prime + 2.75%... a quarter percent difference... not huge... but I might as well try and get it. Thing is anything over $35,000 must be sent in for approval and is not done automatically at the branch. Oh well I'll wait a few days... worst they can say is no right? Either way... Prime is currently 3% at CIBC... so a 6% interest rate isn't that bad... similar to what average mortgages used to be.

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