Financing – A Unique (Weird) Request from the Bank

[Nir]

Hi Everyone,

During my previous purchase I was VERY surprised by the bank`s (RBC) last minute request that I close a non-secured line of credit (LOC) I had with another bank (TD) or reduce the maximum amount there from $10K to $5K(!)

TD LOC balance was zero at the time of their request, meaning I did not use this LOC anyway.

As RBC requested, I went to TD and reduced the LOC maximum amount to $5K, the funds were transferred by RBC and I was able to close on time and purchase the property.

Currently, I have another non-secured LOC this one with RBC though but a more significant amount allowed to borrow.

I really hope I can keep this LOC.

What can I do to minimize the probability the bank will surprise me again by asking me to close or reduce this LOC (with RBC) following my next mortgage application?

For example, should I use/transfer a portion of the LOC amount I can borrow (say 70% of the maximum amount) to my chequing account? last time I did not use any of the amount so had no debt at the time the bank asked me to close it. Or, perhaps they will not ask me to do the same next time as this one is with them/with RBC, not TD(?)

Please note: in both cases – last time and next time I did/will not have to use the LOC as Proof of Down Payment, since I had/have enough without it.
(BUT... I might use it and not the other money I have if they let me keep the LOC )

THANKS,
Neil

 

[Thomas Beyer]

The golden rule: he who has the gold, makes the rules !

Banks look at overall LTD (loan-to-debt) ratio and possible maximum monthly debt payments (car loans, CC, LOC, mortgages, ...) vs. your income. a LOC means: you have access to the money .. even if you do not use it .. but you could use it !

Banks are getting MUCH MUCH more difficult to deal with over the next year or more .. as they took a huge hit on the bad US sub-prime mortgage debt .. so they are looking to improve their cash position .. and a LOC means: a % of this LOC must be in cash as a reserve under the Canadian Bank Act.

Expect banks to cut LOCs down WITHOUT WARNING. If you need the cash in the future, draw on the LOC, pay the 4.75% interest and invest it at 3-5% .. an inconvenience and slight cost .. but a LOC could be cut back by any banks these days !!

 

[Nir]

Hi Thomas,

Are you suggesting that if they (the bank) see I actually use the LOC, then there is a smaller chance they will ask me to close it? I like the idea and as mentioned in my question thought the same just not really sure why(?)

Also, what about the entire mortgage application - doesn`t it make me "look better" considering the entire mortgage application if I do NOT use the LOC/money VS. use the LOC as you suggest and have more debt(?)

Thanks,
Neil

 

[PeterKinchMortgageTeam]

QUOTE (investmart @ Sep 6 2008, 07:07 PM) Hi Everyone,

During my previous purchase I was VERY surprised by the bank`s (RBC) last minute request that I close a non-secured line of credit (LOC) I had with another bank (TD) or reduce the maximum amount there from $10K to $5K(!)

TD LOC balance was zero at the time of their request, meaning I did not use this LOC anyway.

As RBC requested, I went to TD and reduced the LOC maximum amount to $5K, the funds were transferred by RBC and I was able to close on time and purchase the property.

Currently, I have another non-secured LOC this one with RBC though but a more significant amount allowed to borrow.

I really hope I can keep this LOC.

What can I do to minimize the probability the bank will surprise me again by asking me to close or reduce this LOC (with RBC) following my next mortgage application?

For example, should I use/transfer a portion of the LOC amount I can borrow (say 70% of the maximum amount) to my chequing account? last time I did not use any of the amount so had no debt at the time the bank asked me to close it. Or, perhaps they will not ask me to do the same next time as this one is with them/with RBC, not TD(?)

Please note: in both cases – last time and next time I did/will not have to use the LOC as Proof of Down Payment, since I had/have enough without it.
(BUT... I might use it and not the other money I have if they let me keep the LOC )

THANKS,
Neil


Its actually not that unusual any longer and probably means that your ratios are starting to get a little tight. If you were to advance the LOC, your ratios would be higher than the bank would be comfortable with - to reduce their risk, they simply ask you to close it.

More banks are starting to do it, but it does seem to be more common with RBC (depending on who you deal with of course). Aside from reducing your debt servicing ratios in some other way, there is little you can do to prevent them from conditioning this for another product. On your next deal, get a couple of committments from different lenders and then decide which is best for you.

 

[dwb]

Hi Neil,The banks can be ridiculous at times and often have a lot of weird requests. I find it`s never, ever straightforward.. especially when you have rental properties. The only way they are comfortable is if you have like 50% loan to value and 50% mortgage and property expenses versus rental income. What a joke. As we all know investing like that isn`t utilizing the full potential of prudent leverage. To the banks that is what they think is safe and comfortable, but to us as investors that is completely foolish.

This particular request isn`t that unique, banks do this all the time because the banker has to assume the LOC limit is maxed and factor that into their TDS/GDS calculations, just like Thomas said. But weirdly, they also take the argument that the balance is zero to their superior who makes the final decision on the application and they say "we should approve this because Neil is obviously `responsible` with his credit and he likely wont fully utilize what we give him, or put himself in a highly leveraged position as we can clearly see from the way he operates his current TD LOC limit". Then the superior grudgingly negotiates with the original banker and says "fine we will do it but with a 50% reduction to his outside LOC exposure". Happens all the time, unfortunately.

Thomas is right about the applicant`s "ability to use the LOC" making the lender nervous. At the same time, if you take those LOC balances to the limit & then down the road if you go for an investment property financing with all your LOCs maxed out, the lender might then enter hyper-nervous mode as a result & may peg you as a `credit seeker` and thus may turn you down as a result. Without negotiating, without reasoning with you. Just because your credit facilities are all maxed they may think something else is going on beyond what they can see. Like a gambling problem or drug addiction problem or something.

Not to mention that completely maxing out your LOCs to the limit can significantly hamper your credit score, again leading to a possible decline on that basis too.

The solution? I don`t know. But here`s what I would do: I would lean towards keeping the LOC`s free of any balances. This always gives you the ability to say, "As you can see I like to keep a zero balance on my LOCs because I`m very responsible to lend to". And further you can then tell them that you like to keep the full limit at the limit it is at because life is full of surprises and it makes you comfortable that you have that limit there in case of emergencies. That`s exactly what responsible people do.

I see it as keeping the limit at zero gives you the right to say that you`ve proven yourself as a worthy person to lend to because you keep zero balances on revolving credit. You`ll then have that in your back pocket during any negotiations with the banks.

If they really still insist you reduce the limit to your TD LOC, you can do so, but make sure you do it yourself. Once done, go back to your original lender and provide them proof that you did what they asked and lowered the limit.

Then long after the fact (not right away- possible grey area!) you can go to TD and ask them to raise it back up again to the previous limit. And to accomplish this you let them know that you always handled it responsibly - hey! there`s that argument again. TD will then check their records and will see that A) the limit was higher but then it was suddenly reduced even though there was a zero balance and it was always handled appropriately B) the consumer was the one that came into the branch to lower their credit themselves & that there was no bouced payment problem or any other `problems` on the end of TD to force the issue and finally C) banks are fearful of taking away what they give their customers. It kills business relationships. So be sure to raise the point that it was once at $10k or whatever, then reduced to $5k and that if they were comfortable at one point lending to you up to $10k, why can`t they do it again for you? Be able to prove your point that you are still handling all credit facilities responsibly.
Total waste of time? Absolutely. Completely ridiculous? Yes, no doubt. Frustrating experience for the customer just so the bankers have all their paper trail to protect themselves in case of audit? Absolutely. Worth all the running around? I think so... as Thomas quoted we are unfortunately at the mercy of "thee who holds all the gold makes all the rules". Until we make it big enough with our investing portfolio... at that point we would hold all the gold in the banking eyes, & we start to make the rules !

 

[Thomas Beyer]

QUOTE (investmart @ Sep 6 2008, 08:28 PM)
Hi Thomas,



Are you suggesting that if they (the bank) see I actually use the LOC, then there is a smaller chance they will ask me to close it? I like the idea and as mentioned in my question thought the same just not really sure why(?)


what I am saying is: it does not matter if you use the LOC or not .. they assume YOU ARE ALREADY USING THE FULL AMOUNT, even if you are not !



related post, as some banks may cut your unused LOC amount down without asking you : http://myreinspace.com/public_forums/Real_Estate_Discussion/62-6908-More_difficult_lending_environment_.html



So, getting money will be much more difficult going forward !!

 

[EdRenkema]

I had the exact experience when getting financing from RBC for a student rental last December, whey wanted me to close an unsecured LOC at the TD. No worries for me, I wasn`t using it and I knew they would give it back to me no problem, in fact they seemed reluctant to close it!

 

[GarthChapman]

I wonder if they would want those other LOC`s closed if they were RBC LOC`s. Could it be a method to reduce their competitors` business with you? You might ask if they would agree to replace the LOC with one of their own. What have you got to lose?

 

[EdRenkema]

At this time I want to do less business with RBC, their website is more convoluted and difficult to work with and they`ve made mistakes setting up two mortgages and taken interest payments from the wrong accounts. Branch service is satisfactory but TO office arbitrarily implements transactions which are directly out of control of branch people.
TD much easier system to work with but 65% LTV on anything else than principle residence.

 

[Nir]

Thank you Thomas for the clarification and everyone for the input!

Timing wise I do not expect RBC to reduce my LOC limit one-sidedly in the next month especially since I intend to offer them more business and apply for a mortgage within a month…

Therefore, and Perhaps Peter can answer this one, will it not look at least a little better to the banker if he sees 0 balance/I am managing well without using the LOC (I understand the bank will still use the LOC limit for their TDS calculation whether I use it or not).

Thanks,
Neil