Category: Banking

If you only do one thing in 2023…

Those of you who’ve been around here for a little while know how much I hate paying bank fees. However, if you’re new around here, then welcome! Here’s my free advice to you – use it as you see fit. If you only do one thing in 2023 to make your financial life better, consider moving to online banking.

Paying a bank to use your own money makes little, if any, sense to me. It’s a great move for shareholders since it’s a continuous revenue stream which boost bank profits. Most people don’t hold shares in banks, so they’re not reaping those particular rewards. As a consumer, bank fees are an easily avoidable financial nuisance. They’ll run you atleast $100 per year. Ask yourself if there’s anything else in the entire world that you would rather pay for than bank fees. And if bank fees are still at the top of your list, then please continue to pay them and come back next week for more of my bon mots.

The Expensive Banks are plucking you.

I don’t much like being the bearer of bad news, but here I go. You are the golden goose. The Expensive Banks are plucking your money feathers, every single month. Money goes into your chequing account and they reach in, with your permission & consent, to take some out every single month. These were the terms when you opened the account. Good for the Expensive Banks, not so good for you.

At the time of this blog post, the major banks in Canada all offer unlimited banking for various monthly fees:

I’m forced to acknowledge that some of these banks will waive their monthly fee if you’re willing to leave $4000 sitting in your chequing account, earning no interest. In short, you have to leave several thousand dollars in your chequing account in order to avoid paying the monthly fee. I’ve always hated this requirement. In my personal opinion, I don’t think you should have to ransom several thousand dollars in order to keep your money.

Also, the monthly fees go down so long as you don’t go over a pre-determined numbers of transactions per month. For most of these banks, that number is 25 transactions per month. If you do more than 25 transactions, then you’ll pay a fee for each additional transaction.

To recap, the Expensive Banks allow you to pay them a couple of hundred dollars per year. For the low price of a couple of tanks of gas, you can have 25 debits, utility payments, e-transfers and/or ATM withdrawals. Should you need more than 25 transactions per month, you can pay for a more expensive bank account or you can get dinged atleast $1.25 for each transaction over the limit.

What if I were to tell you that there is a way for you to have unlimited debits, utility payments, e-transfer and ATM withdrawals without depriving yourself of access to several thousand dollars?

You have options, and you should choose to use them.

If you only do one thing in 2023 to make your personal finances better, please let it be doing some investigation into the following online bank accounts.

At the time of this post, two banks offer chequing accounts with unlimited transactions with no minimum balances required to have monthly fees waived. You can set up direct deposit with these accounts, just like you can with the expensive banks. These are great products! Why pay fees if you don’t need to? Unless it is your dream to pay bank fees, why not put that money towards making your actual dreams come true?

I’ll admit that online banks don’t have great interest rates. So what? None of the banks offer great rates on their chequing accounts! Besides, the truth of the matter is that your emergency funds should be in EQ Bank, where they will earn atleast 2.5%. Money for your retirement should be invested in well-diversified equity exchange traded funds (ETFs) so that they can benefit from the stock market’s long-term average growth, which is well above whatever rate your bank is giving you.

In case no one has ever told you this, you should not be keeping your emergency funds or your retirement money in your chequing account. Your chequing account is for daily transactions: debit payments, utility payments, debt payments and rent/mortgage payments. Money that is not needed for daily living should be in your emergency fund and in your retirement accounts, never in your chequing account.

Cease paying bank fees, unless you really enjoy doing so.

There’s no getting around the fact that you probably need a bank account. However, I’ve yet to hear a good, persuasive reason for why you should be paying several hundred dollars each year for the privilege of having one. There are equally good options available to you and they are free. Why do you want to pay for something when you can get the same thing for free?

Setting up a new online bank account is not hard. It doesn’t take an exceedingly long time either. You can probably do it on your phone. There are 365 days in 2023. If you only do one thing in 2023 to save money, find some time to save yourself a couple of hundred dollars.

And if you’re absolutely 100% committed to paying bank fees, then atleast buy yourself some shares in the banks so that you can recoup some of your fees in the form of dividends!

Full disclosure: I bank with both Simplii Financial and Tangerine. My accounts have been open for years, and they’ve served me well. If you open an account at Simplii Financial, please use my referral code: https://mbsy.co/6qqBSr We will both get paid money if you do.

HAPPY NEW YEAR!!!

Why I love Tangerine

As you know, I hate paying bank fees. Thankfully, there are many great options available so I never have to. (And if you’re still paying bank fees, please tell me why? You don’t have to pay them either if you’re willing to spend roughly 20 minutes setting up a free online bank account.)

However, I digress. The three best online banks in my opinion are Simplii, EQ Bank, and Tangerine. And to be explicitly clear, I am not being paid by any of these banks for this post. I’m simply sharing my opinion. Feel free to do your own research make your own choices.

At the time of this post, EQ Bank had the highest interest rate on its savings accounts.

Tangerine is my favourite online bank for the reason that it is best suited to help me achieve my goals. First of all, one customer number allows me to create and access up to 5 sub-accounts. Secondly, I can ascribe a name to each of these sub-accounts. Thirdly, I’m able to use automatic transfers from my real-world bank account to the sub-accounts.

All of my favourite personal finance tools are available to me in one online bank. What’s not to love?

Make use of Sinking Funds!

The older I get, the worse my memory becomes. Raise your hand if you can relate! Anyway, having sub-accounts means that I can create pools of money for my short-term goals. Before COVID-19, I traveled every single year so one of my sub-accounts was appropriately named “Travel”.

The beauty of naming my sub-accounts is the inherent prioritizing function that I had to go through in picking those names. Again, I only have 5 sub-accounts so I had to figure out which of my many short-term goals were the highest priority. Travel is still more important to me than furniture, which is why I still don’t have a sub-account called “Furniture”.

Having various sinking funds for my short-term goals means that the money is there when I need it. Un-sexy things like insurance and property taxes need to be paid every year. One of my sub-accounts is a sinking fund for those expenses. When those bills come due, the money will already be there. Do you know how nice it is to not have to scrabble together the money at the last minute?

I also have a sub-account for medium-term goals, namely anything that needs to get purchased in the next 2-5 years. When it was time to replace the windows & siding on my house, I got the quote then got to saving. It took nearly 2 years to save up the money but I wasn’t worried about how to pay my contractor when the work was done.

And once that particular job was done, it was no longer a priority. So that particular sub-account acquired a new name… “Landscaping.” Trees need to be cut down… grading needs to be levelled… new sod needs to be laid. (For those of you who don’t yet own a home, know that it is a money-pit. On top of the mortgage, you will be on the hook for repairs, maintenance, upgrades, and all the other financial joys that come with home ownership.)

Automate!

You know what else I love? Automatic transfers! Yes, you heard me say it – I love automatic transfers. I have my main bi-weekly transfer from my checking account to my very first Tangerine sub-account, which I call my Freedom Account. (Shout out to Mary Hunt of Debt-Proof Living!) I have more transfers in place from sub-account #1 to the various other sub-accounts.

Here’s another reason why I love Tangerine. This particular online bank has a rather unique feature that I haven’t found anywhere else. Tangerine allows me to implement “Money Rules” and these rules allow me to control what happens to the overflow.

Overflow? Blue Lobster, what the hell is overflow?

Dear Reader, if you’ve been doing automatic transfers for any length of time, you know that money piles up. One day, you account has $25 then the next time you check it, there’s way more! That’s the power of implementing automatic transfers. You do it once then move on to other tasks in life. Your money will accumulate automatically without you having to remember to make every single transfer manually.

At Tangerine, you have the option of re-directing money once a pre-determined amount is sitting in your sub-accounts. That re-directed money is the overflow. Pay attention – here’s where the steak starts to sizzle.

Money Rules in Action!

For example, you need to accumulate $3000 for your pet emergency fund. So you set up an automatic transfer. Once your $3000 is in place, you’re not going to cancel your automatic transfer! Instead, Tangerine gives you the power to have that money re-directed to one of your other sub-accounts. Maybe you’re saving up to go on a road trip or new furniture. Tangerine’s system means that money that otherwise would’ve stayed in your pet emergency fund is sent to your next highest spending priority.

And you don’t have to worry about fiddling with the automatic transfer should you need to use some of your emergency funds. Let’s say you need $1500 for your furry friend’s surgery. Your pet emergency fund will drop down to $1500. The automatic transfer will go back to funding that sub-account until it gets back up to $3000. At that point, future funds – the overflow – are whisked away to the sub-account named for your next highest priority.

It’s a pretty sweet little feature. Again, it ensures that your money is going towards your highest spending priorities.

Do yourself a favour.

At the very least, consider opening a Tangerine account. The purpose of this account was, and mostly still is, to make it somewhat difficult to access this money until I really need it. I wanted a simple method to siphon money from my day-to-day spending to my financial goals.

You don’t have to obtain a bank card for this account. I’ve had my Tangerine account for more than 10 years. I’ve never asked for a bank card. Without one, I can’t withdraw money at a bank machine. My money stays in place until I need it. What more could a Single One want?

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Weekly Tip: Figure out your priorities and spend accordingly. There will come a point in life where you realize that it makes absolutely no sense to spend your money on things that don’t make you happy. The sooner you reach that point, the better.

It Never Hurts to Ask

When it comes to money, it never hurts to ask for what you want.

Case in point – the mortgage on my rental property comes up for renewal this spring. For the first time ever, my bank sent me my renewal instructions 6 months before the renewal date. Usually, I get my renewal letter 3 months before I have to sign on the dotted line. In any event, I was somewhat surprised by their eagerness.

Naively, I’d thought they would be more than happy to renew at my same rate. For the past five years, I’ve been paying 2.79% on my mortgage. It’s a sweet, sweet rate and I’ve loved it. The mortgage before had been at 2.99%, so I’d gotten very comfortable with a rate of less than 3% for a 5-year term.

I girded my loins. I straightened my crown. I softly repeated my mantra to myself – “It never hurts to ask.” And I made the first strike.

Round One

My first call to my bank resulted in the perfectly-pleasant customer service representative telling me that the best my bank could offer was 3% for 5 years. I gently reminded him that I’d been a good customer for over a decade and that I also had a significant portfolio with their investment arm. Mr. Perfectly-Pleasant appeared not to be moved. We courteously discussed my ability to take my mortgage elsewhere, a move I was secretly loathe to make. We also discussed the fact that the Bank of Canada would be making four more rate announcements before I had to renew my mortgage.

(Of course, this means very little since the 5-year mortgage rate is far more heavily influenced by the bond market than it is by the prime rate. The prime rate has far more impact on short-term and/or variable mortgage rates.)

At the end of the call, Mr. Perfectly-Pleasant had stuck to his guns. My bank wasn’t going to offer me a 5-year rate at less than 3%. I’d asked and the answer had been “No”… which I’d chosen to interpret as “Not just yet.”

I’d been knocked on my bum and was no closer to my goal of getting another 5-year mortgage interest rate of less than 3%. Luckily for me, this wasn’t my first time at the Mortgage Rodeo. I knew that this was simply part of the dance that always exists when one wants to borrow money without enriching the creditor too, too much.

It never hurts to ask… but there’s never any guarantee that you’ll get the answer you want.

Round one went to the Bank… but, much like the Terminator, I would be back.

Attempt No.2

The second call to the bank didn’t go too terribly differently except for one incredibly distasteful detail – my bank now wanted to charge me 3.05% for a 5-year rate. Wait one damn minute – 3.05% is even higher than 3%!

I nearly fainted from shock!

How on Earth could my bank even consider charging me a higher rate than the one they’d offered before? Did they not understand that I wanted a rate of less than 3% for another 5 years? Had I not been explicitly transparent by stating “I’d like to have another rate of less than 3% for the next 5 years”?

It had never occurred to me that my bank would try to raise my mortgage renewal rate a second time! Was this some strange ploy to scare me by planting the seed that the rate would keep going up before my actual renewal date?

If so, their plan had failed miserably. I knew I was a great customer with a spotless repayment history and excellent credit. Let’s not forget that both my bank and I were well-aware that many other banks would be happy to have me as a new customer… and that they’d be willing to offer me their Shiny-New-Customer rates.

Still, finding another bank to finance my mortgage wouldn’t be exactly free. I’d have to pay an appraisal fee. Someone would be running a credit check. There was also the fact that I’d had to meet the requirements of B20 Stress Test, which I could easily do. There might even be fees associated with moving my mortgage from one bank to another since my bank would do what it could to extract money from me in lieu of all that mortgage interest they would no longer be getting from me. All of these were little hassles that I really didn’t want to endure if I could avoid them.

My bank was simply doing what banks do: trying to fleece me like they try to fleece all their customers. It wasn’t personal – it was simply business.

Sticking to my Guns

I refused to be deterred from my goal of renewing my mortgage for less than 3%. Just because other people were renewing at higher than 3% rates was no reason for me to do the same. If they jumped off a bridge, was I going to jump too? I think not – my parents had raised me better than that!

Ignoring the also-pleasant customer service representative’s statement that I could get a 5-year fixed mortgage of 3.05%, I asked her if there was any way that the rate could be lowered. Like my wise aunty has often said, them’s that asks are them’s that gets.

Ms. Also-Pleasant did her employer proud. Once again, she repeated that my bank was willing to offer me a 5-year rate of 3.05%. She said that her computer told her that this was the bank’s best rate of the day. Much like her predecessor, Ms. Also-Pleasant told me that I was free to check back in the future. She even added a teaser by stating that the rates might go down in the spring since a lot of people would be buying houses.

The trouble was, I didn’t want to have the task of renewing my mortgage hanging over my head until the spring. I wanted to get this chore crossed off my list, but I wasn’t going to renew unless I got a rate of less than 3% for the next 5 years. Why couldn’t they just give me what I wanted?

I held my tongue and I kept my cool. If I’ve learned anything during my few, precious years on this little Blue Ball of ours, it is this: The person who talks to the public is never the person who has all of the power. There’s no sense yelling or cursing at those on the front lines because they can’t override the decisions made by those who are higher up on the chain. However, they do have the power to put in a good word on my behalf to the people who make the decisions. And this means that it never makes any sense to be rude, mean, or un-kind to the front-line soldiers. (Also, they’re human beings doing a job so you shouldn’t be rude, mean or un-kind to them in any event.)

Again, I ignored the offer of 3.05% and I again asked – politely! – if there was any way for that rate to be lowered. You see, Life has also taught me that it never hurts to ask for whatever it is that you want. If anything, asking for exactly what you want exponentially increases your odds of getting it.

Ms. Also-Pleasant’s response to my polite inquiry thrilled me to the core. She stated that she could forward my request to the Pricing Department and see what they could for me.

Success!!! I had no idea what the Pricing Department was, nor did I have any clue as to what it could do for me. All I knew at the end of the second call was that I didn’t have to start shopping the market for another mortgage nor had I yet reached the point of calling a mortgage broker.

Round Two is what I’d like to call a draw. I hadn’t gotten what I wanted, but I hadn’t landed on my bum either.

Victory!

Phone call number three can legitimately be categorized as a late Christmas present. When I got back to my office after the holidays, my bank had left me a voicemail. Returning their voicemail resulted in unbounded glee for the rest of my first day back in the office.

The mysterious folks of the previously-unknown Pricing Department had finally understood what I wanted… and they’d granted me my wish. Finally, my bank was offering me a rate that I could live with for 5 years = 2.84%. My new rate from the Pricing Department was even lower than the rate my bank was advertising to its own Shiny-New-Customers.

Woohoo! This was more than I’d been paying, but still less than my acceptable upper limit. As much I’m not a fan of banks, even my bank should be allowed to make a wee bit of money from me. I truly feel that I’ve been quite generous by allowing my bank to increase my mortgage rate by the equivalent of 0.01% for each of the next 5 years. I’d allowed my bank to save face by charging me a slightly higher rate. My bank can still hold its head up and participate when all the banks stars talking trash about customers on the playground.

At the end of the day, I’d gotten exactly what I’d wanted. And the cherry on this particular sundae was that my name would not be flagged as a Problem Customer because I’d been polite during all of my interactions with everyone.

So you see… it never hurts to ask for what you want.

Could I have gone back to the Pricing Department and asked for a lower rate? Sure.

Would I have gotten it? Maybe…or maybe not.

Do I feel foolish for not asking for more of a discount? Not in the slightest. My life isn’t about looking to save every single penny. I had a goal and I’ve met that goal. Now, it’s time for me to direct my attention and my energy towards satisfying other goals.

After all, I was one of them’s that asked and now I’m one of them’s that’s gots! ;-}

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Weekly Tip – If you’d like to have $1,378 by the end of the 2020, then I invite you to participate in the 52-Week Savings Challenge. You can complete the weeks in order or however you see fit. Just make sure to make every required contribution then enjoy/invest/donate/whatever-you-want-do-with your money on December 31, 2020.

Why Isn’t Credit Card Math Taught in School?

Today, I checked my credit card statement and found out that I have to pay $191.13 by October 10, 2019. The box at the bottom informed me that if I were to make the minimum payment ($10) at my current interest rate, then I would pay off my balance in 2 years and 0 months.

WTF?!??! At $10 per month, it would take me 24 months to pay off $191.13. So, I’d be paying $48.87 (= $240-$191.13) in interest over 2 years. The interest of $48.87 is 26% of the outstanding balance of $191.13. Ridiculous!

I also have to remember that if I make any other purchase during that two year period, then the amount owing would go up. that would mean that my bank would charge me even more interest.

So why isn’t credit card math taught in school?

I remember learning how to add, subtract, multiply, and divide. There were lessons on algorithms, on calculus, on algebra. My teachers spent time on the subject of simple interest, compound interest, and how they differed. I very definitely recall word problems involving distance and time.

Yet at no point during my many, many years of schooling do I remember any lessons on how to calculate credit card interest. Sure – I know that if I don’t pay my bill then I’ll be charged 19.97% annually. But is that compounded monthly or annually on my outstanding balance? Does that rate apply to any fees that I might have to pay if I miss a payment?

Math lessons would have been that much more useful to my adult life if I’d been required to solve the following math problem:

Henry indulged in some retail therapy and charged $7500 to his credit card. If he only pays back the minimum monthly payment of $225*** while being charged a rate of 29.99% annually, then how long will it take Henry to repay his credit card? Secondly, how much interest will Henry pay on that credit card debt? *** The minimum monthly payment is equivalent to 3% of the outstanding balance.

Not My Parents’ Fault

I’m not going to blame my parents for this gap in my education. I’m fairly certain that credit cards weren’t a thing when they were in school. You can’t teach what you don’t know.

Credit card math was never an issue in my house when I was growing up. My parents had two credit cards between them. My dad had a gas card that he used when we took our annual summer holiday. My mom had a retail store card that was used to buy appliances for the house. What they taught me about credit cards is as follows: NEVER CARRY A BALANCE.

Full stop. This is what I learned from my parents’ example respecting the issue of credit cards. This is a basic lesson that pretty much works in all situations involving a credit card balance. Pay your credit card balance in full every single month.

Unfortunately, my parents’ example failed to explain how credit card interest will be calculated for those unfortunate folks who do not pay their balances in full each and every single month. Though incredibly useful and entirely admirable, the lesson from my parents taught me nothing about credit card math.

Surely the Credit Card Websites Have the Answers I Need

Let’s recap. My parents didn’t teach me credit card math at home. My schools didn’t teach me credit card math even though I was in their care and custody from the ages of 6 to 17. Despite receiving my undergraduate degree from the school of business, I never learned how credit card interest was calculated. For that matter, my business degree was also useless in teaching me about the nefarious death-grip of student loans or anything else related to personal finance.

The next logical place to search for answers is from the source. Surely the banks who issue credit cards would have a calculator dedicated to credit card math on their website. It would seem only logical that they would have some kind of online tool that explicitly shows how interest on credit cards is calculated and compounded. Customers would be able to enter their outstanding balance and the interest rate on the card then press a button to get a number representing how much interest would be owing on the outstanding debt.

CIBC offers a credit card calculator to encourage you to accumulate points. There’s not a single mention of how the interest is calculated if you don’t pay your bill in full. To be fair, the inquiry “How is interest calculated on my purchases?” results in a link to the cardholder agreement. Pages 6-7 of CIBC’s cardholder agreement set out how payments are applied to a credit card balance. Yet, there’s no calculator that allows borrowers to plug in their own numbers to see just how much interest they will pay if they don’t pay their balance in full.

I’m not picking on CIBC. I went to Scotiabank’s website too, and they didn’t have a credit card interest calculator either. Similarly, TD’s website was a bust. BMO has a variety of calculators for mortgages and savings, but does not offer any online calculators to help their customers figure out how interest is calculated on credit cards.

Maybe Canada’s biggest bank has what I want… RBC’s website isn’t perfect but atleast it offers an explanation, but not a calculator, of how interest is charged on its credit cards. Kudos to RBC for not making its customers wade through a cardholder agreement!

How disappointing… It’s almost as though the purveyors of credit cards do not want their customers to be able to figure out how much interest they will have to pay on their credit card debt if balances aren’t paid in full. I’m willing to go out on a limb here. I believe that credit card issuers don’t want their customers to understand credit card math.

Even the Gurus Can’t Answer my Questions!

If you’re not yet familiar with his teachings, then allow me to indulge for a moment. Dave Ramsey has created a series of Baby Steps to help regular people get out of debt and to achieve wealth. To be clear, I love the lessons about how to get out of debt by creating a debt snowball. If you’re ready to commit to a get-out-of-debt-plan, then start doing what Dave Ramsey says and keep doing it until all of your debt is gone.

Yet, even Dave Ramsey fails to explain how credit card interest is calculated. This is hardly surprising. He hates debt and he encourages people to never carry credit cards. Still, he’s been in the business of helping get out of debt for nearly 3 decades. I thought that maybe, just maybe, he would be the one to explain credit card math to folks…even if just to tell people that they’re stupid for partaking of it.

Government of Canada to the Rescue!

The good folks at the Financial Consumer Agency of Canada have a partial solution. Their website offers a credit card payment calculator that will tell you how much interest will be charged if you don’t pay your credit card off in full. The calculator lets you add in your current balance and your interest rate. The search results ably demonstrate the impact of paying more than the minimum monthly balance and how much interest can be saved.

So far, this is the best credit card math tool that I’ve found online.

I’m still in the dark about how to calculate interest on my credit card balance. So I will resort to my parents’ wisdom. I resolve to never carry a balance. The mystery of credit card math may or may not haunt me for the rest of my days, and that might be okay.

So long as I pay off my credit card balance every single month, I’ll never need to worry about the box at the bottom of my statement which tells me that it will take 24 months of my life to pay off an amount as small as $191.13 if I make the minimum monthly payment while never charging anything else during that time period.

What is a HELOC?

What is a Home Equity Line Of Credit? Short answer – it’s a debt trap that’s best avoided.

At its heart, a HELOC is a debt product that banks offer to homeowners which permits the homeowner to go into debt by spending the equity in their home without selling it first.

For example, if you have $200,000 worth of equity in your home, you can get a HELOC for an amount up to $200,000 depending on the lender. Without a HELOC, you would have to sell your home to get your hands on the equity. In other words, someone would give you money in exchange for your house and you could then spend that money however you wanted. There would be no fees or interest payable on that money because it would be yours.

The HELOC is a completely different beast. With a HELOC, you get access to the equity in your home via a loan from the bank without first having to sell your home. This sounds like a good thing, but it’s a debt-trap that you would be wise to avoid.

Banks charge interest on outstanding HELOC balances

You must keep in mind that the banks will charge you interest if you use a HELOC. Again, you’re spending your equity via a loan from the bank. Any bank loan is accompanied by an interest payment. Interest accrues until such time as the HELOC balance is repaid in full and it runs from the moment that you use it.

The interest rate on a HELOC is usually lower than the interest rate charged on a regular Line Of Credit. A regular LOC is an unsecured product, whereas your home secures the HELOC. If you don’t pay back your LOC, the bank cannot initiate foreclosure proceedings and take your home away from you. This is why they charge you a higher interest rate on a LOC.

Banks can foreclose on you if you don’t repay your HELOC

Before extending you a HELOC, the bank puts a charge on the title to your home. This charge against your title is similar to a mortgage. It ensures that if you ever sell your home, the bank’s HELOC will be repaid from the proceeds of the sale. You’ll get whatever’s leftover after the mortgage debt and the HELOC debt have been repaid.

Again, this particular debt product is essentially a loan against your home. It allows you to spend the equity in your home however you want. No one will be watching you to ensure that you don’t spend your equity on items which will not increase your financial security.

Having a charge on your title makes you vulnerable. Should you fail to make your monthly payment on the outstanding HELOC balance, the bank has the right to foreclose on your home to get its money back. Also, the bank has the right to demand full repayment on an outstanding HELOC balance whenever it wants. If you can’t repay the balance when asked, the bank has the right to foreclose on your home to get its money back.

Let’s say that your housing market goes down and the amount of equity in your home drops simultaneously. You house used to be worth $350,000 but now it’s only worth $250,000. Effectively , you’ve lost $100,000 worth of equity in your home. The bank may get nervous because their loan to you, in the form of the HELOC, is no longer backed by an asset that can fully repay the outstanding balance. The bank may decide to cut its losses, which means that they will demand full repayment of the outstanding loan balance. Should you not repay that balance, then the bank can proceed to foreclosure in order to get its money back before all of the equity in your home disappears due to market conditions.

HELOCs facilitate the siphoning of your home equity in dribs and drabs

When you use a HELOC, you are spending the equity in your home instead of increasing it. You are increasing the debt owed on your home each time you spend its equity.

One of the most dangerous ways to use a HELOC is to have it attached to your debit card. There is nothing stopping you from spending your home’s equity on mundane items. Think of trips to the coffeeshop, to purchase concert / sports tickets, to buy clothes, to finance your daily life. If you need a HELOC to survive from on paycheque to the next, then you’re living above your means. You’re working your way into a severe debt trap. Figure out how to free yourself and stop digging a bigger debt hole.

If there is ever a good use for a HELOC, it’s to make major repairs to your home that are required for your safety, i.e. replacing the furnace or the roof.

There is nothing wrong with you spending your home equity on the costs of your daily life if you need to. Just don’t do it via a HELOC! The wiser course of action is to sell your house and get the cash. That way, the entire amount of your home’s equity is available for your life’s expenses. You won’t be paying interest and fees to the bank for the privilege of spending your own money. You won’t run the risk of foreclosure. You won’t be indebted to the bank. And the money is still yours to spend as you wish.

Lessons from the Teller’s Wicket

After my obtaining my undergraduate degree, I took a year off before going back to school. I got a full-time job in a bank, and boom! My financial education really began. Despite the good example set by my parents, working in a banking institution is where I really learned about banks and how to use them to my advantage when it came to my day-to-day money.

 

My first lesson was that the bank’s products might not be in the customer’s best interest. Each month, there was a marketing promotion where we – the tellers – were required to sell products to customers. The first campaign that I was involved in was selling home-equity lines of credit (HELOC). A HELOC is a debt product where the collateral is your home. By using it, the customer is able to spend down the equity value of their home up to the HELOC’s limit and the customer pays the bank interest for the privilege of spending their own equity. It took me a little bit to understand that the bank was essentially asking people to buy debt, but I eventually got the gist of the product. One of our suggested hooks for selling the HELOC was to tell customers that they could borrow money from a HELOC to invest in their RRSP and then repay the borrowed money in monthly equal instalments. All I could ask myself was: why not simply make that same monthly payment to your RRSP directly instead of paying that same amount to the bank in the form of a loan repayment, which comes with an interest penalty? (Obviously, I was  restricted from asking the customers this question. Doing so might have led the customer to not acquire a HELOC, which meant that the customer wouldn’t go into debt and the bank wouldn’t get paid interest.)

 

It took me a long time to realize that the hook of depositing the money to the RRSP now instead of later was simply a form of immediate gratification. My method of making payments to one’s RRSP over the upcoming year was a form of deferred gratification. Of course, my method meant that the bank didn’t make money from the interest charged on the loan from the HELOC so I was not permitted to suggest my method to the customer even though my method was in the customer’s best interest. Since the bank was paying my wages at the time, part of my job was pretending that what was important to the bank was also important to me. (That particular lesson has served me well in every employment position I’ve had since leaving the bank!)

 

The second thing I learned from my time as a teller is that banks care more about customers’ money than customers do. It wasn’t that the customers didn’t care at all about their money. It was simply that the bank cared more and was far more effective in keeping the money than the customers were. Surprisingly to me, it wasn’t very hard at all to get people to sign up for credit cards and credit products. People craved credit, which is another way of saying that people very much wanted the ability to go into debt to the bank. I don’t know what they did with their credit, but I was always surprised that they wanted credit more than they wanted to have money in their bank accounts.

 

The third thing I learned at the bank was that paying off a mortgage was a smart move. I’ll never forget one customer who came in on a Saturday to make a lump sum deposit of $20,000 against his mortgage. When I asked the loans officer why the customer had done this, I received my very first lesson about how the act of making lump sum payments immediately decreases the amount of interest owed on a mortgage. Right then and there, I promised myself that I would make extra payments against my mortgage once I had one. When I worked at the bank, an interest rate of 7% was not uncommon. This was well before 2001 when rates started dropping to historic lows.  (One of my friends was able to secure a 5-year rate at 2.39% on her rental property – sweet! I doubt I’ll ever see rates drop that low again in my lifetime.) When I obtained my first mortgage in 2001, the rate was 6.5% and I took advantage of prepayment options to pay it down quickly. I then re-mortgaged my property for a rate of 4.79% in 2004. When I re-financed my most recent mortgage in 2015, I was able to secure a 5-year rate at 2.99%! Sadly for me, I’m quite certain that I will be renewing my mortgage at a rate of atleast 4% in 2020 given that the mortgage rates have started to climb.

 

Fourthly, I learned about bank fees and how to avoid them. Essentially, you can keep a large amount of money in the bank as a float to ensure that you aren’t charged bank fees. That float ranges anywhere from $2500 to $7500, depending on the bank and the type of account on offer. Alternatively, you can open an account with one of the online banks. Right now, Simplii (formerly PC Financial) and Tangerine offer free banking. If you aren’t already with them, make the switch and keep your bank fees for yourself. Why are you paying bank fees if you don’t have to? Aren’t you better-served by keeping that money for yourself to be used to achieve your personal goals? Never ever forget that paying bank fees is a choice that you make as a customer. Bank fees are not an addiction. You have the power to open a no-fee bank account and to use it the same way that you use expensive, fee-generating bank accounts. You might have to use a bank but that doesn’t mean you have to pay service fees or interest to do so. As a customer, you have choices and you have the power to keep more of your own money.

 

I worked at that bank every Saturday for roughly three years after I went back to school full-time. It was not a particularly glamorous job and it definitely cemented my belief that working directly with the public is not for me. However, my time spent at the bank was invaluable because it taught me a great deal about how the banking industry systematically and ever-so-efficiently fleeces its customers and what steps customers can take to level the playing field. These lessons will stay with me for a very long time.