CREDIT permits people to acquire goods and services today with payments over time. It involves the use of someone else's money.
LEVERAGE is the process of multiplying your available resources by using someone else's money.
Whatever the application, it is all debt.
Good Debt, Bad Debt
What do we mean by this expression? The quick answer is that it refers to whether we pay the interest with after tax dollars (bad) or whether we can deduct the cost of borrowing (good). Is leverage good or bad?
One of the most significant purchases people make involves the use of leverage and non tax deductible interest. That item is your personal residence. The fact we can't deduct the interest does not deter us from leveraging to buy a home.
When we buy a house we don't ask for a leverage loan, we ask for a Mortgage. The lender files a chattel mortgage against the home. This means that if we do not pay, The mortgagor will have the right to seize the property and sell it in order to recover his debt. There are several types of mortgages.
When loans are "unsecured", the cost of borrowing is higher than when the loan is secured (chattel).
Managing your credit is an important feature of financial planning. While the prudent use of leverage can help people create wealth, the use of credit can also create severe problems for some people. What I think of as the credit card phenomenon is a method of providing easy access to fairly significant amounts of credit without having to sit down with a banker and justify the loan. The cost of borrowing is excessive compared to secured borrowing and the "add ons" provided by the card companies (insurance plans) can make the cost of carrying a balance quite a burden. Banking Alternatives
High Ratio Mortgages
A High Ratio mortgage is on where the down payment is less than 25% of the property value. Typically they will call for 5% or 10% down. The purchase of Mortgage insurance from CMHC is mandatory and typically adds 1% of the mortgage value to the overall cost of financing
Conventional Mortgages
A conventional mortgage is a mortgage that is no more than 75% of the value of the property. This type of mortgage is considered the most cost effective as it does not require the purchase of special insurance which represents an additional cost
Loan to Value Mortgages
This is the expression used for a mortgage that is issued for 50% or less of the property value. The underwriting requirements are less stringent and typically require a good credit bureau rating, but does not require "financial underwriting". In short, you do not have to be employed to consider this type of Mortgage. In some cases this is a useful to Self-employed people.
Secured Line of Credit (Mortgages)
When you receive a secured line of credit from the bank, they will file a chattel mortgage on your property up to the credit limit of your LOC. This is to secure your borrowing "if any".
