March 29, 2021 | Varmints

Blog doggess Sue borrowed a bunch of money against her home from her bank. The one with the Penguins.

She knows the drill. Get a HELOC. Invest the proceeds in non-registered financial assets. Make interest-only payments. Then deduct every dollar from taxable income. All good. Especially when the loan is so damn cheap – the prime rate (2.45%).

But whoa. What’s this letter from the bank?

The loan rate has changed. Now it’s prime +1%. Sue quickly beat on TNL@TB and as a result the branch has agreed to review things. But here’s the question:

I’m reaching out to you now as I don’t know anyone else on the planet that speak to this unequivocally.

•             Can Canadian banks unilaterally change rates on HELOCs?

I presented the facts of this matter to our banker and she replied: I will forward your concern to customer care department . To see if they can give you an answer on the changes that took place.

I have not received any correspondence from CIBC since. I look forward to your comments… given the indebtedness of our nation, it would be a great shock for thousands of Canadians to learn their HELOC’s can be unilaterally changed.

My response: Duh. Yes. “If you look at the fine print on your agreement you will likely see that the ‘prime +%’ is a guideline, and the bank has the right to change it arbitrarily (so long as you are informed) just as they have the ability to call the loan immediately without recourse. The bank always wins, Sue…”

And her reply was as expected:

Thank you… not what I was hoping to hear but you are 100% correct. It wasn’t under ‘Interest’, or in soft wording, it’s spelled out clearly on the last page under ‘Guarantee’… “We may, at any time and from time to time, without the consent of or notice to any guarantor… increase or decrease the Interest Rate…”

I wonder how many people leveraging themselves to the eyeballs know that tidbit. It seems like a good plan… using home equity for wealth generation… but clearly not without risk.

Indeed. Borrowing money to invest is an intoxicating concept when (like now) relatively boring balanced & diversified portfolios pump out robust returns, yet loan rates are historically repressed. And when the interest is deductible at your marginal rate, it’s party time. But, as Sue reminds us, there is always risk.

Not only can markets fluctuate but so can rates. HELOCs are demand loans. They can be called on a banker’s whim. The rate of interest can be changed with one email. They’re registered against your property’s title. And they essentially turn your house into an ATM, offering a seemingly ‘free’ giant pot of money that can go to work earning more money, plus tax advantages. Accepting a home equity line of credit and using it appropriately takes discipline and planning. If it’s called and you lack liquid assets to repay the loan or a higher rate means you can’t handle the payments, well, yer pooched.

Having said that, money borrowed at less than 2.5% with deductible interest to plow into a portfolio turning out 6-7% is a no-brainer. But, but, but… (a) understand it’s a long-term strategy and don’t hyperventilate during inevitable downturns, (b) be balanced, diversified and consider professional help, (c) no crypto or Reddit suggestions (d) know the loan can be called anytime or the rate upped, (e) don’t tell your MIL, (f) always have a strategy to repay the principal and (g) borrow modestly – not 65% of your home’s entire equity, as allowed,  but more like 20% max.

And yes, the bank always wins.

Now, a question from Sal who sees his Mama as a useful investment vehicle.

I have POA over my mother’s financial affairs.  She lives month to month on her pensions at 80 years of age and does not have a TFSA and wouldn’t know what one is.  I’m thinking of opening a TFSA in her name and fund it with money from selling my house, and assigning myself as the beneficiary.   What issues do you think I might have with such a plan and is it wise?  I’m concerned that the CRA might look at this unkindly should they find out.    Should I avoid linking my bank account with the TFSA and funnel money into her accounts and then into it?  Should I do it in small amounts to avoid potential flags?

So it’s perfectly okay to open a TFSA for your spouse or adult kids and fund it. Technically the money becomes theirs, but you can always have an agreement with them to repay you. Stuffing your aged mom’s account with your money when you’re power of attorney – just to designate yourself as beneficiary and benefit when the old gal kicks – is, well, despicable. And illegal. And you deserve two quarts of fire ants in your shorts.

A POA cannot designate him/herself as bene unless the document clearly states so. Sal, you need to know what a power of attorney is – someone legally obliged to put the interests of another person above your own. The POA must keep accurate records, act in complete good faith, avoid all conflicts of interest and keep their property separate from that of the one who granted this authority.

Did Mom bring you up to be such a scheming weasel?

Garth Turner March 29th, 2021

Posted In: The Greater Fool

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