MY VARIABLE RATE IS PRETTY STABLE, ISN’T IT?
A Line of Credit is a demand product. This means your bank has the option of increasing your interest rate by any amount, at any time. This is in addition to any increase in the Prime rate which is the base rate for your LOC. ALL Canadian Banks launched Line of Credit re-pricing programs this year. Some banks increased rates by as much as 300 bps.
A SMALL INCREASE IS NO BIG DEAL. WHAT’S THE WORST THAT COULD HAPPEN?
An increase in Prime and/or your interest “surcharge” would mean your minimum payment could increase without warning, leaving you with a payment you might not be able to afford or with less of that payment going towards paying down the principal.
BUT A LOWER RATE TODAY IS STILL BETTER, RIGHT?
A variable rate also means you have no way of knowing up front how much interest you will actually be paying by the time the LOC is completely paid off. Aren’t interest costs one of the main reasons for considering a variable rate today? And yet a variable rate LOC doesn’t give you the security of knowing the final cost for your loan that a fixed rate does.
I CAN ALWAYS LOCK IN WITH A NEW LOAN!
Thinking about “locking in” down the road with a fixed rate loan when the variable rate on your LOC starts to rise? Chances are fixed rates will have risen as well, leaving you potentially locking in at a rate higher than being offered to you now.
MY JOB IS SECURE; I PLAN ON PAYING IT OFF PRETTY QUICKLY.
Economic uncertainty is all around us at the moment. If your LOC is tied up to purchase your “toy”, do you have enough reserve to see you through an unexpected change in your financial situation? What about that leaky roof or other unforeseen expenses that have a way of cropping up at the worse possible moment? A lot of people keep their LOC available for these unwelcomed surprises, but it’s not a given that your bank will approve an increase to your LOC to cover these costs. Also, LOC’s typically have scheduled interest only payments which need to be made each month. Without principal payments being applied to the balance it can be quite easy to find yourself in a tough situation when it is time to buy a new recreational toy but haven’t yet paid off the old one.
THE ECONOMY IS GOING TO START GETTING BETTER SOON. RATES AREN’T GOING TO RISE FOR AWHILE, ARE THEY?
The Cost of Funds has risen recently and banks will have no choice but to eventually begin passing those costs on to you. You may not be able to control global credit issues and fluctuating market conditions, but choosing a fixed rate is something you can control and know your finances are safe.