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Bank Rate Down…Line of Credit Rate Up

Most Canadians with a personal line of credit (PLC) or Home Equity Line of Credit (HELOC) are rejoicing as rates come down as our Bank Rate dropped to an all time low 0f 0.5%  that should ultimately lead to a 0.5% reduction in the Bank Prime rate that is currently 3%.

Hold off on re-doing your budget as your interest costs may be going up rather than down. Most people believe that their line of credit adjusts up or down with prime and the premium above prime stays constant.

This is not the case as I found out recently that the small print in some line of credit contracts indicate that the bank can increase the premium above prime at their discretion. I read one contract that indicated the bank could increase rates to as much as 6% above prime and intended to increase their premium by 1% on all lines of credit in April.

While the government is trying to encourage consumers and businesses to spend our way out of recession, banks are taking steps to increase margins and profitability. There is nothing wrong with wanting to increase profitability but one questions the timing based on the struggles that our economy is currently facing.

What are your thoughts on this interest rate increase? Were you aware of a banks ability to increase rates at their discretion? Your thoughts and comments are greatly appreciated.


3 Responses

  1. I am continually amazed at the cunning of Canadian banks. When the Bank of Canada lowers its prime rate the big banks as a group set their heels in and fight tooth and nail to not pass this on to the public. So far the have kept 15 basis points (a basis point is one one-hundreth of a percentage point) using this tactic.

    I personally believe this is price fixing as all the big banks work in concert. Independent corporate strategy is not the motive in this case. The Competition Bureau should investigate.

    Variable rate products are sold and explained as a product where the borrower takes all the risk. As such the banks can offer better rates. Now with the increase they have adopted a policy of “heads I win – tails I still wins by changing the playing field”.

    Personal and Home Equity Lines of Credit are sold on a basis of prime less or plus some amount. In any interactions I have had with lending personnel never was the concept that the bank could at their whim change the contract. It was always explained to me that the borrowed funds were at a set rate comapred to the bank’s prime rate. Using fine print the banks have skirted breaking any laws but they they have most definitely broken the spirit of the contract.

    If the bamks do not live up to their part of the bargain – why should the Canadian public? Imagine if Canadians for just 60 days decided to not direct deposit their paycheques, but rather just cash their cheques – take the money home and not pay their lines of credit and mortgages for that 60 days. Seems drastic doesn’t it. The banks would have enormous cash flow problems and would probably behave better in the future. But that would be extortion.

    Extortion Hmmm – So is this increase.


  2. banks seem to be enjoying themselves. Gouging Canadians with a 1% hike in a LOC of $100,000 equals $1000 total annual cost increase!
    Well why not! Where can they go to get better?
    Isn’t that good business? Screw-em while you can!

    With no end in sight, all we can do is hunker-down!
    It can only get worse!
    Maybe bankruptcy protection is the only protection against the pirates of bank-sass!
    But then again, nothing can harm the banks… they lose but the government bails them out…
    The government has given more cash to use, and less cost by reducing their interest rate, and pleaded with them to open up their coffers and lend more money to stimulate the economy, and the greedy buggers have decided to take it out of our butts!

    The next thing will be that we will read about billion$ bonuses for bank executives for gouging us and turning a tidy profit again so they can lose it elsewhere on the planet.

  3. I received a letter from TD bank that they were changing the terms of my home equity line of credit from prime plus zero to prime plus one percent. When I phoned the hot line I asked if what hey were doing was in fact legal.

    What I was told is that the fine print of the contract does indeed permit the bank to change the rate with respect to prime at any time and at there discretion. In addition the bank is changing the rate for everyone who had at a rate of prime plus one percent or lower to prime plus one percent. I asked if there was anything in the contract that limited what spread the bank could charge and was told there was not.

    After that call contacted ING Direct regarding the terms of 5 year variable rate mortgage. The current rate they offer is 0.1% above ING prime and the spread above prime is fixed for the 5 year period.

    Both ING and TD have a prime rate of 2.25%

    Guess what I am doing now.

    I think it is dishonest of the big 5 banks to advertise that there variable rates loans, lines of credit etc are based upon a fixed spread above prime, to not inform clients when they enter those contracts that the spread is subject to change, and then change the spread.

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