Understanding the Risks of Open Variable HELOCs and Line of Credits
Winona Reinsma • April 7, 2020
Check your documentation to see what you agreed to!
Are you aware that if your line of credit or variable product is "open," that it may be subject to interest rate increases at the Lender's discretion?
For example, a secured HELOC may be registered for a ceiling rate of Prime +10% even though your set rate was lower at the time of issuance. Lenders have the right to change your discount or premium at any time simply by notifying you.
Today, I received word from one of my clients that their unsecured line of credit went from Prime +4% to Prime +9% even though they always make their payments on time. When interest rates (the Bank of Canada overnight lending rate) normalizes, it is unlikely that their Lender will reduce this premium!
Also, not everyone understands that running the outstanding balances of these type of products right up to the credit limit risks is hurting your credit beacon score and history. This further exasperates the possibility of refinancing at a preferred rate.
Now, more than ever, it is imperative to take action by:
- Conducting a full review of your financial plan and budget.
- Check your credit documents to see what you agreed to.
- Weigh your credit options by checking with an independent mortgage broker
- Restructure where necessary.
When you decide to make hard decisions to strengthen your financial situation during and after Covid-19, you need to ask yourself an important question:
- "If you are saying yes to a new financial plan, what are you prepared to say no to?"
It's your mindset, your ability to face hard facts and truths, the decisions you make to formulate a new financial plan, and then your fortitude in working that plan that empowers you. Saying no and finding a better way can be your road to financial security, relieving stress, and getting through this crisis and the next.
In your best interest,
Winona
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