Secured lines of credit: What are they good for?

I’ve recently recommended secured lines of credit (or SLOCs) to a few of my clients instead of a mortgage.  SLOCs are similar to variable-rate mortgages, as the rate changes depending on the prime rate. However, SLOCs are also unlike variable-rate mortgages because: (1) only the interest is due on the payment date (instead of both the interest and principal), and (2) they are fully open (which means that they can be paid off at any time without a penalty).

Here are a few scenarios where it may be more appropriate to get a SLOC instead of going with a more traditional mortgage:

1. A SLOC could be for you if your mortgage is coming up for renewal and you are planning on purchasing a new house, or if you are not sure what your future plans may be

SLOCs are an inexpensive way to allow yourself more time to decide what you’d like to do with your home.  For instance, if you’re planning on moving within a year but aren’t sure about specific plans, SLOC’s can help bridge the gap until you’ve got a more solid “game plan.” Moreover, speaking with a mortgage professional can further help you plan out your next move – from a financial perspective.

2. A SLOC could be for you if you are planning a significant renovation on your home

You can incorporate renovations into your home through your mortgage, but if you’re planning a significant renovation you may want to consider a SLOC. A SLOC would allow you to pay your contactors as required, and would put you in control of the money – as opposed to your bank, for instance, which can be inefficient. Once the renovations are complete, a traditional amortized mortgage can be put into place. Your “new” property would then be appraised at that time to confirm the improved value, and an amortized mortgage would help you pay down the renovations in a timely and organized way.

3. A SLOC could be for you if you are investing equity from your home into a non-RRSP, or real estate

Whenever you use the equity in your home to invest in a non-RRSP or real estate, the interest on that portion of the mortgage, or SLOC, is a tax deduction. Because you may not want to pay off the principal on the investment loan, a SLOC could be a more appropriate loan than a traditional mortgage.

These examples are just some of the ways to best use a secured line of credit. Please contact me directly via e-mail at lastovic.s@mortgagecentre.com or call me at 519-763-3900 ext.1001 to discuss your questions.