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Is your banker your friend?

It’s not hard to join the ranks of bank bashers in our current environment. Their profits are up and most of us have a fairly good understanding of why. Fees are rising and being applied to additional services. This quarter I wanted to write about 3 particularly bothersome issues that (in my experience) most people are not aware of.

Please note that many (if not most) of the individuals in the banking industry can be of great assistance. We need to know how to ask the correct questions.

1) When is Prime Rate not Prime Rate?
Have you applied for a line of Credit? If this line is going to be secured by your home or by investments, the bank should be charging you Prime (currently 6.00% at time of writing). Recently a client wanted to re-organize some finances and establish a line of credit for investment purposes. They wanted it in two parts - one for deductible interest (investment line) and the other for (unfortunately) non-deductible purposes. The bank officer was very responsive and more than happy to oblige. The rate was to be at Prime. As an obnoxious financial planner, I asked the client to clarify whether Prime really meant Bank of Canada Prime or if it was “WXY” bank Prime.

Why would I ask this? Is Prime confusing? Well for bankers it can be. Approximately 12 years ago the Royal Bank was the first bank to distinguish between Prime and Royal Bank Prime. Their prime was, conveniently, Bank of Canada Prime plus ½%! Later it became 1% above Prime!! I was shocked!!! This was not explained to clients and no one was asking the question. They do not do this today. It is an important one - 1% per year on a $60,000 investment loan costs $600 more. In 10 years that is $6,000. Who would you rather see have that money??

This “Prime” was stated as the best rate the bank could give her. When the client asked, they discovered that it was indeed 1% above Prime as a BANK rate and not Prime. The client refused the loan and the bank then determined that they could meet the Bank of Canada Prime.

The moral of the story – do not accept their first offer and always clarify interest rates.

When is 10-20% early repayment not a 10-20% early re-payment?
Refinanced your mortgage recently? Trying to get a better rate? Changing houses and not able to “port” your mortgage? Want to do the full Smith Manoeuvre but you’re not set up right?

It has also come to our attention that some Banks and mortgage lenders have overcharged when closing out the old mortgage. Normally there is an interest rate penalty. This is usually a three month interest charge in the last 2 years but can be an entire interest rate adjustment if the mortgage has more than two years left. At the same time, most mortgages allow a pay down of 10-20% annually without penalty. Some of our Big Banks and Mortgage lenders have not been taking this into account automatically. This means that if you have renewed your mortgage you may have paid a fee on part of the money to which no fee was entitled! To receive the credit for the allowed lump sum, clients have to specifically ask that this calculation be made. This can save hundreds and sometimes thousands of dollars.

If you have re-arranged your mortgage within the last number of years please verify all charges levied and seek a refund if you were not treated properly. If you are planning to re-arrange your mortgage in the near future, please, ask the questions up front.

RRSP Loans?
Recently we tried to re-organize an RSP loan for a new client. They were at prime plus 2% for an RRSP loan and we knew it was high. (RRSP loans are usually at prime.) The loan was designed to take advantage of unused RRSP contribution allowance so it was more than the typical loan amount. They had done this through Investor’s Group and the bank was National Bank.

If you need/want to do this we can and will help. I am absolutely a “bear” about making certain that people do not create long term debt for a short term issue. In this case the loan was for 10 years! How a planner could rationalize a 10-year loan for a deduction to be taken in one year is beyond me and a topic for another letter.

This is the banking point. Beware when you buy products from Captive sales organizations! They may have a deal with the bank that is not in your favour.

In this case we found out that the High Interest Rate was there to cover a commission paid back to the selling organization and sales person for placing the loan with them. I hate that stuff! (I love commissions but quite simply will not compromise my client’s best interests to enhance my paycheck!) This client is now left with the time consuming exercise of applying for another loan to pay off the first.

Additionally they want to change investments because they no longer trust their Rep but are looking at some pretty substantial fees to do it.

In the end I have encouraged the client to re-do the loan and save somewhere over $2,000 in interest.

Bob Adams CFP prepared this article for the Cambridge Chamber of Commerce.