Do you accept this offer or not?

angelapeng

Inspired Forum Member
Registered
Aug 19, 2011
177
19
18
Vancouver
#1
Recently, my bank offers me a Line of credit at 1:1 ratio using cash as a collateral. The term is like this: the cash has to sit in the bank investing in a fixed term GIC, right now, it is 2-2.5%. Then they loan you a LOC at prime rate, you can use this money to do whatever you want, if for investing purpose, certainly the interest expenses will be tax deductible.

I do not see any benefits to people like real restate investors? The bank is saying that the cash is safe at least, and why I want to have the cash siting in a 2% GIC? I am still not convincing.

Do any of you experience this before?

Thanks
 

Matt Crowley

Senior Forum Member
Registered
Dec 14, 2013
874
380
63
Calgary
#2
Ya, it's done between currencies sometimes for small amounts instead of issuing a swap. What the bank proposed is dumb though. Don't invest money only to borrow at a higher rate.
 

KhoaN

Inspired Forum Member
REIN Member
Oct 22, 2012
76
25
18
Alberta
#3
Assume your tax bracket is 40%, prime is 3.95%, you could deduct almost 1.6% so you still pay 2.35%. your GIC earns 2% @ 40% tax bracket, your after tax earning is 1.2%. So it doesn't make sense.

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Likes: Christine

ThomasBeyer

Senior Forum Member
REIN Member
#4
Recently, my bank offers me a Line of credit at 1:1 ratio using cash as a collateral. The term is like this: the cash has to sit in the bank investing in a fixed term GIC, right now, it is 2-2.5%. Then they loan you a LOC at prime rate, you can use this money to do whatever you want, if for investing purpose, certainly the interest expenses will be tax deductible.

I do not see any benefits to people like real restate investors? The bank is saying that the cash is safe at least, and why I want to have the cash siting in a 2% GIC? I am still not convincing.

Do any of you experience this before?

Thanks
It’s good for the bank. Not for you. If you need cash why not use it, rather than paying 2-3% above what they give you?

LOC doable up to 75% against multiple real estate assets. Shop around. Many banks offer it, under different names, like Total Wealth Program. Do you have room in your real estate over and above the first mortgage, up to 75% ? Do you have decent income to support it ?
 
Likes: Carla Reis

Michel Lafleur

Frequent Forum Member
REIN Member
Apr 30, 2015
133
136
43
#5
My guess is that a LOC is the product of the week/month at your bank, and there is some sort of sale rep incentive to sell these.
As commented above a few times already - if you have cash, why not use it? If you have cash, why tie it up in a GIC so you can spend the same amount of more expensive money.
And with the most recent announcement on mortgage rule changes, banks will consider your LOC limit as part of your financing. So....if you get a LOC at say $50k, next time you apply for a mortgage, the bank will look at your ability to service debt aw if that $50k LOC is maxed out at the "benchmark qualifying" rate. If you open a LOC today, it will diminish your mortgage-ability in the future.
 

Shane564

Shane Melanson, Developer & CRE Investor
REIN Member
Apr 30, 2015
11
2
3
Calgary AB
shanemelanson.com
#8
Can you secure the LOC against something else? A property or other collateral? If you're securing against cash- it defeats the purpose.

Banks are good at helping themselves make money. Some good input from others above
 
Likes: Tina Myrvang