The Dollars & Sense of Borrowing
by Barbara Fabian

Credit Rating In Canada lenders report your credit use to Equifax or TransUnion. These two major credit bureaus keep tabs on how much credit a person has, how much credit they use and how promptly they pay it back. Your credit rating or credit score helps lenders decide whether they will lend to you and at what cost. Needless to say, having a clean credit rating is a huge asset. Any information—good or bad—stays on your report for seven years. Institutions lend money to individuals in a number of ways including:

Line of Credit (LOC): An LOC can be a convenient borrowing tool when traveling, renovating or investing but can be dangerous if misused. It is also known as revolving credit. Unlike a loan with an end date, a Line of Credit can be paid down and used again. LOCs tend to have higher limits and lower rates than credit cards. Access is usually via cheque or debit card.

Consolidation Loan: A consolidation loan is an option open to those who would like to put all their monthly debt payments into one, sometimes smaller, payment. It can be a smart move and may help with budgeting. But be careful; consolidating year after year indicates that you are living consistently beyond your means.

Mortgages are loans issued for the purpose of buying real estate. The borrower gives the lender a lien on the property which becomes the collateral, or security, for the loan.

Conventional Mortgage: A conventional mortgage is 75 per cent or less of the value of the property that secures it. Financial institutions require 25 per cent as a down payment to lend conventionally. When a borrower does not have enough for the down payment, then the Canada Mortgage and Housing Corporation (CMHC) or GE Capital Mortgage Insurance Canada (GEMICO) must step in and insure the loan.

CMHC and GEMICO both offer homebuyers mortgage loan insurance that enables them to buy homes with as little as five per cent down payment. CMHC also has a program allowing zero down. The insurance cost is added to the mortgage. For more details: www.cmhc-schl.gc.ca.

Term and Amortization: Amortization refers to the length of time before the mortgage is paid in full. Twenty-five years has long been the typical amortization period. Due to extreme rises in housing costs, some financial institutions will now offer up to 40-year amortizations. A term is a period of time for which a rate will be fixed for your mortgage. One to five years is the norm; some lenders offer seven- and 10-year options.

Terms can be open or closed. An open term means that the borrower can pay off any or all of the mortgage without a penalty. To pay off a closed-term mortgage the lender usually requires a minimum penalty of three month’s interest.

Rates on terms may be fixed or variable. A fixed rate does not change for the duration of the term. Variable rates may change because they are tied to the prime rate which can go up or down at any time.

Credit Insurance is offered to borrowers on LOCs, loans and mortgages. If the borrower dies, insurance will pay off the debt in full, thus preserving the borrower’s estate. As with disability coverage, insurance may also be used to make the required payments on the debt if the borrower is unable to work due to a disability. Both are valuable tools to help keep your financial house in order. Many credit ratings have been saved due to disability insurance having been in place.

Barbara Fabian has two daughters and lives in Brentwood Bay. She is an Account Manager at Island Savings Credit Union.