# What's the easiest bank to get a L.o.C.?



## healey (Jun 1, 2009)

L.o.C.= Line of credit

Factors:
-I'm currently on leave from my job. Will be returning in October. So I don't have "employment income" coming in right now.
- annual salary when I go back will be about 45K
- will be using it for investing

I got 30K from my credit union but they required that I have it "guarantored" as I don't have "employment income" right now.

I want to get about 70K more on top of that (for a total of 100K). What would be the easiest bank to get it at, without needing another flippin' "guarantor"? I've heard Royal Bank...is that true?


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## dcaron (Jul 23, 2009)

healey said:


> -I'm currently on leave from my job. Will be returning in October. So I don't have "employment income" coming in right now.


Im sorry to tell you that you should have asked for your LOC prior to your leave of absence, to lessen the hurdles. 

If you are looking for a "secured" LOC, the bank will be looking for co-lateral (house, other investments, etc), but offer you the lowest rate (3-5%). Im guessing you may be forced into a "unsecured" loan based on your situation, with a much higher rate (~10% APR). 



healey said:


> will be using it for investing


This is considered as leveraging, and viewed as a risk for the banks.



healey said:


> I want to get about 70K more on top of that (for a total of 100K). What would be the easiest bank to get it at, without needing another flippin' "guarantor"? I've heard Royal Bank...is that true?


Good luck with that ... You may need a co-signor ...


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## OhGreatGuru (May 24, 2009)

Good Luck! 
You want to borrow more than twice your modest annual income to "invest". Why should the bank believe that you can invest this in a way that will provide a guaranteed return at least sufficient to cover the interest payments? And you'e not offering any security or guarantor?
I sure hope my bank wouldn't lend you their depositors' money under those conditions.


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## healey (Jun 1, 2009)

Thx for the replies guys. I appreciate it.

Sounds like this probably won't work out as I had assumed. Might have to try and get a lower amount...


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## specialk (Jul 14, 2009)

healey said:


> Thx for the replies guys. I appreciate it.
> 
> Sounds like this probably won't work out as I had assumed. Might have to try and get a lower amount...


a) What are you trying to invest in?
b) How will you make the payments if your job doesn't pan out for some reason?


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## healey (Jun 1, 2009)

specialk: 

a) I want to use the money to invest in Canadian REITs.
b) With the distributions from the REITs.

Cheers


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## mogul777 (Jun 2, 2009)

Doubt any bank will give you money for that purpose. And why invest if your going to use the proceeds to pay the interest? You may want to rethink this plan and try it with realistic numbers.


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## healey (Jun 1, 2009)

mogul: Why invest if I am going to use the proceeds to pay the interest? 
Because I want to develop a stream of passive income à la Derek Foster. Once the LOC would paid off, I'd own the REITs. What do you think?

And btw, what do you think would be a realistic number for a LOC? I don't have that much experience in getting banks loans, so I myself am not sure what realistic would be ;-).


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## furgy (Apr 20, 2009)

healey said:


> specialk:
> 
> a) I want to use the money to invest in Canadian REITs.
> b) With the distributions from the REITs.
> ...


As a confirmed income investor and a fan of REIT's , I think it is basically a good idea ,(if you had the cash).

Except for the fact that it is using way too much leverage which makes it very risky.

No bank will lend you that kind of money for that reason.

I have well over half of my portfolio in REIT's and it is paying me incredibly well , but I wouldn't leverage to invest at all , I can't imagine what it would be like if a person had to spend years paying back money that was lost in the stock market.


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## Potato (Apr 3, 2009)

The easiest way to get approval for that kind of leverage is to open a margin account at your broker. 

Of course, then you need to meet the margin requirements (e.g., if you want to borrow $100k, you will need >$100k in equity to start). If you don't have the equity to secure a LoC with in the first place, it's unlikely you'll get one from the bank, or if you do it'll be at a rate so punitive that the leverage won't be worthwhile.


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## healey (Jun 1, 2009)

Thx for the replies potato and furgy.

Potato: that's a very interesting idea of using the margin of a broker. I could use my present 30K of LOC and double that to 60K. I wonder if the interest rates would be higher than an average bank LOC? I'm guessing probably so...I'll have to look into that.

This idea has a additional risk tho--margin calls. With the Derek Foster method, one doesn't really care much what happens to the price of the stock--it's distributions remaining constant /increasing that is important. So, a bank LOC _would _ be better as they don't do margin calls. 

Anywhoo, I'll have to mull this over more, but it's a very interesting suggestion.


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## PMREdmonton (Apr 6, 2009)

Derek Foster mostly got lucky - he is not some financial genius/guru. Be wary of using leverage because it can also mean very large losses.


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## healey (Jun 1, 2009)

*pmre:* I agree that Foster isn't some genius. But I disagree that he got lucky and that's how he was able to retire early--I think he came up with what a great strategy that blows the conventional _RRSP-65-capital gains_ paradigm out of the water.

And yup, point noted on dangers of leverage.

*Potato:* I checked into some margin rates of my two brokers. Questrade charges 3.75% currently. And Interactive Brokers has an incredible rate of 1.718%! That's much lower than what I had expected.


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## PMREdmonton (Apr 6, 2009)

Also remember that Foster cashed out in the March lows thinking the market was going to substantially tank further. He believed PEs should shrink back into the 6-8 range like they did in the 80s recession. However, he ignored the fact that investors weren't going to be so averse to stocks because of record low rates of returns on bonds which drove people back into equities.

I think the best advice is to invest once your debts are retired. Stick to your TFSAs and RRSPs for tax reasons. Once you have substantial equity in your house that you can afford to tap into from a Smith Manouever, proceed cautiously. Remember that if it were so easy to get better returns from REITs than a LOC, banks wouldn't lend you money and would invest in the REITs themselves.


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## Potato (Apr 3, 2009)

healey said:


> *Potato:* I checked into some margin rates of my two brokers. Questrade charges 3.75% currently. And Interactive Brokers has an incredible rate of 1.718%! That's much lower than what I had expected.



Yes, brokers are often able to lend money at rates that are competitive with LoCs because the rules help protect them from default -- if your margin is suffering they can instantly force you to sell something to cover.


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## dcaron (Jul 23, 2009)

Potato said:


> Yes, brokers are often able to lend money at rates that are competitive with LoCs because the rules help protect them from default -- if your margin is suffering they can instantly force you to sell something to cover.


That makes a lot of sense. Ive heard they can do that as co-lateral.

That doesn't remove the risk of leveraging though. What if they run out of shares to sell to cover for your nosediving portfolio, placing you in deeper debt? I guess your only option is declare bankrupcy at one point...

Id rather stick with my mutual funds and the "couch potato" portfolio approach. This has worked really well for me, and I almost fully recovered from the 2008-2009 Q1 nosedive.


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## healey (Jun 1, 2009)

*pmre:* yes, I'm aware the he cashed out in March. I agree with him tho that the market might still go lower. 

Yes, that's correct that banks would tend to invest in REITs if they were such a good deal. For banks, I guess they are just too risky for their business models. With loans they can get collateral. With REITs they don't have any.

*Potato:* yes, in thinking it over it makes sense why they can offer such rates. A) They have collateral. B) they know _exactly_ what you are investing in (unlike getting a LOC from a bank...ex: you can say it's for a student loan but use it to go a trip to Mexico!), C) they can recall the loan if the collateral (ie. whatever you invested in) drops too much in value for their comfort.

*Dcaron*: yes there is definitely risk here (just like in any investment). The question is whether the degree of risk is too high for my liking. I'll have to think this over a bunch more before I proceed.


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## dcaron (Jul 23, 2009)

healey said:


> *Dcaron*: yes there is definitely risk here (just like in any investment). The question is whether the degree of risk is too high for my liking. I'll have to think this over a bunch more before I proceed.


Im even more concerned with the level of risk with your leveraging strategy (someone else's money), versus investing with your "own" money. As long as you are comfortable with that. 

My investment comfort level is "pay check deduction" funding of a portfolio of mutual funds, heavily weighted with equities (index funds). Im 18 years from retirement and can handle and ride out the bumps.


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## PMREdmonton (Apr 6, 2009)

It is possible that the market will re-test March's lows. However, at this point it does look like a weak recovery has begun, the pessimism regarding impending depression has decreased, banks have been resuscitated. I would say the market is fairly priced right now based on return from equities compared to returns from bonds. If bond rates start going up aggressively then the market may become overpriced again.

Anyhow, solid financial practice is to buy when equities are cheap in general and it is hard to make that case presently so I don't see the point in leveraging into anything right now - especially real estate which has not yet had a correction in Canada unlike the rest of western civilization.


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## dcaron (Jul 23, 2009)

*Consequences of Leveraging, and taking on too much debt*

Timely excerpt from Gail Vaz-Oxdale's blog (http://gailvazoxlade.com/blog/)

“We can apply a positive (credit) balance in any of your accounts with us….against any debt or liability you owe to any of us…We can set off any positive balance against any such debt or liability in any manner and at any time we consider necessary (unless we have specifically agreed not to do so) and we are not required to first give you any notice ”

So sayeth the TD Bank, reports the Globe and Mail.

The desperate measure of a desperate institution comes after people who have been highly leveraged in their investment arm are falling short on covering their losses. (Yah, so much for leveraged investing people!) We’re about to see a lot of the same on lines of credit and credit cards as the economy takes its toll on people’s cash flow and they begin to prioritize eating over debt repayment.

I’m already hearing reports of lenders arbitrarily raising interest rates on credit lines. People are coming home to statements notifying them that their rates have just gone up 4%, 7% as much as 11%. If you weren’t convinced that Debt Free is the way to be before, then this most recent heavy-handedness of some lenders should be your wake-up call.

Hey, they are well within their rights, legally. It’s their money you’re using, and if they want it back, they can take it.

I’ve long held my chequing and savings accounts in different places than I hold my credit even though I don’t carry a balance. I remember reading about a lender’s right to “take” their money from an account back when I was working for those good fellas and thought it wise to keep my apples and oranges in separate places. You might want to give some consideration to splitting up your business so that you’re not open to cross-dipping.


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## Mockingbird (Apr 29, 2009)

dcaron said:


> I’m already hearing reports of lenders arbitrarily raising interest rates on credit lines. People are coming home to statements notifying them that their rates have just gone up 4%, 7% as much as 11%. If you weren’t convinced that Debt Free is the way to be before, then this most recent heavy-handedness of some lenders should be your wake-up call.


Here's one newspaper article from last April. The rate for certain LOC accounts jumps from 4% to 12.5%.
Times Colonist: Credit union reduces line-of-credit rate


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