All Topics / Finance / LOC loans being fully drawndown at settlement

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  • Profile photo of Joseph12Joseph12
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    @joseph12
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    Has anyone heard of line of credit loans being fully drawndown at settlement and any surplus funds are put back into the loan at settlement and then you could draw down on the surplus funds up to the loan limit ?

    If yes how come line of credit loans are being fully drawn at settlement ?

    Please advise ?

    Thanks.

    Profile photo of YossarianYossarian
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    Fairly common approach taken by mortgage brokers to maximise ciommission. Some lenders will pay on the drawn-down amount or a fixed % of the LOC limit, whichever is the larger. By drawing the whole lot at settlement and then immediately paying it back in, they get the bigger amount.

    Slowly becoming harder to get away with…

    Profile photo of Stuart WemyssStuart Wemyss
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    Yossarian, that is a silly comment. If you knew how mortgage brokers got paid you would know that majority of lenders claw back commissions if vast majority of LOC is not utilised within a certain time. Therefore, setting up LOC which aren't used does not generate revenue in most circumstances.

    If its a genuine LOC it does not have to be drawn – only limit activated (similar to a credit card.

    Cheers

    Stuart

    Profile photo of Joseph12Joseph12
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    So regardless of what the loan purpose is for, for example refinance home loan etc a true line of credit is not to be fully drawn at settlement ?

    Profile photo of Stuart WemyssStuart Wemyss
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    That's right. You only draw what you need. Remaining amount is not drawn and you can access it later.

    Profile photo of YossarianYossarian
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    Stuart Wemyss wrote:
    Yossarian, that is a silly comment. If you knew how mortgage brokers got paid you would know that majority of lenders claw back commissions if vast majority of LOC is not utilised within a certain time. Therefore, setting up LOC which aren't used does not generate revenue in most circumstances.

    Most but not all, Stuart.

    I know a fair bit about broker commissions, actually, and can tell you from personal experience it has always been a little lurk and not uncommon. After all, why do you think the utilisation requirements were brought in in the first place? Harder now (as I mentioned in my post)  but still occurs .

    If you can suggest any other logical reason why someone would recommend fully drawing a LOC on settlement, I'm all ears ;)

    Profile photo of Stuart WemyssStuart Wemyss
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    Maybe I am unrealistic but brokers suggesting people borrow more than they need just to get paid more would hopefully be in the minority. Its very unprofessional if that's the case.

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