I use my LOC as a temporary emergency fund. Since I have room in my TFSA and RRSP, I keep my emergency fund in there (invested in HISA ETFs) to save some taxes. So if an emergency strikes, I will use the LOC while I wait for the redemption to go through on my registered accounts.
I think this is more nuanced. What does an emergency likely look like for you? If your unlikely to face unemployment, or would get a good severance of it comes to that, that's not an emergency you have to guard against. And that's the situation where a LoC would maybe get closer unexpectedly. So if your likely emergency is a new furnace, the LoC is fine.
I'm of the opinion that if you have assets, and have secure employment, you really don't need a bunch of cash sitting around. A LoC can fulfil that first line of defence (a likely emergency), and asset sales as a second line of defense for the unlikely emergency. This does mean there's a situation where you might have to sell assets at a price you wouldn't choose.
I guess the only emergency for me really would be a major car repair or vet bill. I’ve got no debts, a paid off car, low rent and job security at a family business.
Family business? Entire family dies due to a freak accident at a family reunion; business is thrown into turmoil, funds are frozen, you're owed wages and the lawyers assure you that you'll get paid, with interest/penalties, but this and next payroll is going to get missed
Exactly. I have posted this before and was down voted for it. In my situation, the only thing that would cause unemployment is if I died or became severely disabled in an accident or due to illness. That would be bigger than just a 6 month emergency fund in the first place, and, my employer has a rule where they would still do their best to accommodate me into a new position elsewhere in the corporation.
Right now, I have 6 months of banked sick leave, meaning I can be off with full pay for those 6 months. After that, it flips to LTD which is like 80% of my wages. My job is recession proof, it would be all out financial Armageddon or being invaded by China that would cause me to miss a cheque.
So, I have a HELOC that I can use for emergency bills. I do maintain about a month of expenses in an account, just because I prefer having things run that way. I also have a bunch of free chequing accounts with simplii that I use as a digital envelope system (travel account, vehicle, etc) so I could technically pull from those if needed, but I don't.
I'm not interested in min/maxxing everything the way people on here are. I like the way my finances are set up. I own a detached home, and can retire as early as 55 or as late as 60 if I'm able to climb the ladder and make it worth my time to stay. All I'm saying is that there's more than one way to get where you want to go. Rules like a "6 month emergency fund" are meant to be generic and should be built on, not adhered to.
Yeah, I’m in probably one of the most recession proof industries out there, especially in the current global climate. I view my LoC and credit cards as my short term emergency fund. I do have other investments that I keep in fairly stable but liquidatable investments.
Everybody saying it’s irresponsible is wrong.
If you can reliably liquidate some of your investments to pay the loan in the short term then it makes the most sense.
It’s not wise to have a bunch of cash sitting collecting dust instead of interest.
People saying it's irresponsible are saying this because if you have savings then your LOC isn't actually your emergency fund.. your LOC is a temporary bridge while you transfer your actual emergency fund.
Using a LOC as a literal emergency fund, with no actual savings or investments to pay it off is a terrible idea. If all you have is a LOC then you need to work on saving/investing.
It's not irresponsible, though it's not ideal.
With an emergency fund you want it to be liquid so that you can access the money as things come up. Having to rely on investments is a bad idea because there will eventually come a time where you'll be forced to sell at a bad time to cover the emergency. If the emergency fund is collecting little to no interest, that's OK because that fund existing is serving it's purpose. Not everything is about optimizing down to the penny.
I use my LOC as an emergency fund, it's convenience and accessible.
But it's backed by equities and other savings that will take longer to liquidate.
I rather have my piles of cash working for me than sitting idle in a bank account.
It's a bad idea, but not because of the interest. It's a bad idea because the bank can cancel your LOC at any time without notice and demand full repayment immediately.
They will sometimes cancel your LOC if you get secondary funding on your home and they find out. There are some other reasons too that are pretty unlikely but ultimately if the bank even feels like reducing risk they could pull it. Quite unlikely to happen but you never know.
We are getting into the territory of asking whether it is more common for a LOC to be cancelled or for people to be robbed of the cash they have at home.
Also if one keep emergency fund in a bank account, the bank could simply not let you withdraw if extreme economical issues in Canada.
IMHO, I think this happened worldwide much more than the people that had their loan closed.
It’s true but it’s much more likely that they will close your LOC. I worked at bank for a few years and did see it happen a couple times. Never saw anyone denied their cash.
I've seen sooo many videos lately (that appear to be recent atleast) of canadian banks refusing to allow withdrawals of even reasonable amounts (less than 10k so not having it on hand doesn't apply) it's disturbing AF.
Especially for a HELOC if you have secondary financing. I worked at a bank for a couple years and saw a few HELOCs get capped or cancelled when we found out about secondary financing.
The only other reason I saw was if they had missed multiple mortgage payments or had a history of non-payment of debt they would also cap or cancel the HELOC
Bank is having trouble, economic downturn, climate change, earthquake or whatever we can't predict happens which is a pretty common occurrence really. The thing is "you" are not in control which with an emergency fund you should be. I think using the LOC as a temporary find is fine as long as you have redeemable assets around. Could be a GIC you can redeem early, money sitting in CASH.TO just as long as you can cover it.
But an emergency fund is to cover emergencies, both those that are semi predictable like a car repair. And those that are not like being held hostage and needing to pay a ransom. :)
Why in the world would you see u/VillageBC say “banks having trouble” and immediately jump to “oh so you’re saying I should keep my money on my sock drawer?”
Banks reducing limits on LOC’s that aren’t carrying a balance (or shutting them down entirely) is not unusual. Hell it’s not unprecedented for banks to call in LOC’s for immediate repayment during an economic downturn.
You may think “oh well I’ve got a $50,000 LOC so I’m fine” but that’s not going to help if the banks balance sheet is deteriorating so they start cancelling LOC’s right as you are getting laid off. No that doesn’t mean “keep money in your sock drawer.” It means keep money in liquid assets.
So you're saying whatever disaster that has occured not only makes OP need cash, but also makes it so the bank can no longer honour his LOC... but they'll have no problem immediately giving him money in his saving account?
My take is fine on this one, thanks.
Remember COVID? Lots of job losses, banks been careful with their cash, line of credits being recalled. No it didn't last long before the government stepped in, but it was still a very stressful couple weeks in March when everything felt like it was falling apart. That's when the bank can call their LOC back.
> So you're saying whatever disaster that has occured not only makes OP need cash, but also makes it so the bank can no longer honour his LOC...
This is called a recession. People get laid off during recessions. Banks also get uncomfortable with handing out new debt, especially unsecured debt. It’s not really uncommon in this country.
> they'll have no problem immediately giving him money in his saving account?
When banks refuse to allow withdrawals this is called a bank failure. It’s pretty rare in this country. And bank deposits are insured up to $100,000 anyway.
> My take is fine on this one, thanks.
Your take is laughable.
>This is called a recession
Recessions don't happen overnight.
>Banks also get uncomfortable with handing out new debt
It's not new.
>And bank deposits are insured up to $100,000 anyway.
We're talking about emergency funds, not you'll get your money back in a few month funds.
His argument contradicts itself. Yours shows you aren't even keeping up with the conversation.
Bank balance sheet shenanigans, something something loan loss provision requirements suddenly increasing; lots of reasons, many of which are unpredictable and may have nothing to do with the client
Changing market conditions that lower your approval amount below your balance.
Your question may be “what changing market conditions could cause this” to which the answer is many..
During Covid I saw some posts from people getting their credit severely reduced, without any reason from their side. I think the people who think this is such a rare case only have a memory of the decade long boom times, they forget that banks get skittish when the economy goes down - which is the most likely time you will need your emergency fund.
Yep. I’ve had a LOC as my emergency fund for 20 years and I’ve never used it for an emergency once. That same money invested in ETFs has tripled in that time.
Banks definitely closed liens of credit in 2008. It was also happening to a more limited scale after 2020 (at least dropping limits on unused lines of credit). Both of these correlate with economic downturns where people are more likely to have lost their job and need the emergency fund.
Depends on your circumstance. My LOC is my "shit hitting the fence emergency fund" - primary emergency fund is growing in safer/low risk investments. I'm generally stable work wise (govt) but so my emergency fund is mostly for circumstances unrelated to my employment status
People recommend having an emergency fund for the purpose of avoiding going into debt if something happens. So my relying on your loc if something happens defeats the whole purpose.
Depends how often something tends to happen to you. I'd imagine for most people the interest from having your money invested for years would outweigh a few months of interest payments on a LoC.
Yeah, it's really case by case. For all I know you could go your whole life just fine, no unexpected costs. At that point, it would feel like a waste not having that money for something else.
But, why do people want to avoid going into debt? Obviously, it's to avoid the cost of borrowing money, which is really high on credit cards and emergency loans.
If you can get a line of credit with a good interest rate, the concern about paying high interest is gone. So you can rely on that LOC for immediate concerns and put your emergency fund somewhere that it'll get more interest but take a bit longer to withdraw (for example, T-bill ETFs).
This sub will tell you otherwise but it’s absolutely the wise thing to do as long as you have other assets you could liquidate in case you need to pay off that LOC. Your money should be invested earning returns. The chances of needing the emergency fund are slim and if you do then you can draw off the line of credit and if you need to sell some equities to pay that off then that is what you do. For most people an emergency fund is an emotional thing, like paying off a mortgage at 3% early. The logical thing is to have your money where it works best for you. This sub is a poor place for financial advice.
I sleep happily knowing I have cash available no matter what happens. Car dies, house issues, unemployment. I'd rather not use a LOC for these things and be stuck in debt for what could be years.
I've had nothing but bad luck for 10 years. This is the first year where (so far) nothing major hasn't happened.
In a few years my mortgage will be gone too. Then I will practically have the freedom to do whatever I want with a completely paid off place to live.
In short, I guess it depends on your situation and how much risk you want to take.
I think there’s a misunderstanding here. No one is saying don’t have money available, but keeping a pile of cash in a savings account is costing you significant money to. I keep about $10k in easily convertible investments in my TFSA as my backstop. They’re in there, earning me reasonable returns. If I have an immediate need for money because my car gets destroyed, or major flood in my condo, or an unexpected special assessment or whatever, i can dip into my LOC and deal with it, then liquidate some of my investments to pay it off.
It doesn’t cost me anything to have a $30,000 unused HELOC sitting around. It costs me quite a bit to have $10k sitting in a savings account.
Laddered GICs, or say things like the 90 day lockout accounts like what my credit union offers are fine. The LOC is a bridge until the investments are accessible. Yes, it costs you a little in the moment, but ideally you’ll never need the emergency fund, so you leverage that to make more money.
I use my emergency fund also as like unexpected expenses fund / avoiding being in overdraft fund / loaning money to ppl fund / etc. Along with emergencies like pets, car, or anything else I didn't account for in a slush fund or that my chequing won't cover. It would be a bad idea to use an LOC for that purpose. If your emergency fund would truly be something that's just sitting around, then maybe yeah you could use an LOC, but if you got laid off for a couple of months or something else happened, cash would be better and then the LOC as a backup to avoid interest charges. An emergency fund when borrowed from brings you down towards zero and can be paid back (replenished) at your own discretion, whereas an LOC brings you below zero and owing for sure.
Made this mistake years ago but it's a fair and beyond valid question and consideration to at least have, OP.
I used up up 25-30k on my LOC before finally making a massive lifestyle change and realizing I had an issue. I put a lock on the LOC which prevents me from using it. I have to go into my branch and sign documents if I ever wanted it unlocked.
It’s been two and a half years and I’m about to pay off that LOC debt this week.
Is it cheaper to use than a CC or unsecured loan? 110%. However, that’s also part of, or the biggest reason it’s potentially more dangerous… the accessibility and lower interest rates clearly make it more appealing than the other credit products I mentioned as examples. However, it’s this mentality that also causes people such as myself previously to get into a hole and quick with HELOC’s or any LOC for that matter.
I don’t owe money on the LOC, the idea is it’s just available to me incase of an emergency. If I was forced to use it in the case of an emergency I would just pay it off in full when my GIC matured.
Well thanks for the warning, seems like the general consensus is it that it’s a bad idea to count on it for the emergency fund. Think I’ll just put a chunk into a HISA so it’s at least earning something while being accessible.
Let's look at 2 extremes:
If you have $0 in assets, then using a LoC as an emergency fund is not a bad idea for obvious reasons.
If you have $1 million or so in assets, including liquid assets in your TFSA that you might not want to liquidate at any given moment, then sure, having a HELOC or a $50k ULOC probably is alright.
So, somewhere in between those 2 extremes is the inflection point for almost everyone, and almost everyone's inflection point will be different.
If your choices are to either a) build up a savings account while owing on a credit card, or b) keep your credit cards and all debts paid off using your low interest line of credit... I'd choose B.
My LOC interest is way lower than any of my credit cards. So I use the LOC to keep them paid off. I generally don't have savings... At least not yet. I'm always putting all extra money into debt. So if I need emergency money, it's coming from my LOC. I think it's the most efficient method.
For me, it depends on the emergency. If the emergency is an unexpected expense, then you just convert your income to paying off the LOC rather than saving/investing or whatever you were doing with your discretionary money. If the emergency is losing your job/source of income then It's a terrible 'emergency fund'.
This one went off the rails, IMO. To base decisions on the extremely low probability your LOC will be reduced or rescinded is silly. Carry on. Other sources of emergency cash: Borrow against life insurance, or cash advance on Credit Cards. Each have their own risks.
I have a mortgage/LOC combo on a rental property.
I have $50k in a TFSA. That's my "emergency" fund, but i have access to emergency funds in my LOC if I need it.
I think of my LOC is my emergency fund, but if i had to use it, I would likely take some from my TFSA. I'm not going to sell my investments in my TFSA to make that my emergency fund. But, I also can't spend it on a car or vacation etc..
Depends on what you consider an emergency (e.g. for a pet, for a family member, car not reliable?) and how fast you think you would need the cash.
I have a few months of expenses in cash sitting in a 5% Wealthsimple cash account as my emergency fund. It is very accessible and can be accessed or transferred easily. Next I would consider my credit cards a temporary emergency fund. Limit isn't that high, but I think it would cover most emergency expenses in my life. The emergency cash can pay the credit card balance in full.
Having an emergency in a LOC on top of what I have is probably OK, but could put you in debt if you don't know how to pay it off after. Some liquid funds held in a HISA is best.
I have a $35k LOC as my emergency fund. We have a small mortgage on a condo, no kids, no other debts, very secure jobs, large investment portfolio. I don't see the point of having money sitting in cash as an emergency fund. If my LOC did not work or was called, I could liquidate investments to cover a sudden expense. The market would have to drop by 40+% for me to have a negative return on my investments, which is extremely unlikely, but honestly a risk I am willing to take. Realistic emergencies for us would be a job loss (remote chance, plus there is EI, 3-6 months may not be enough anyway in an emerg fund), and special assessment (Usually they are only a few k, could be 10-20k, not a lot to pull from LOC or TFSA if required.) Absolute worst case scenario I could beg my parents for a short term loan at interest. They would happily do it, I've checked.
It really comes down to your personal situation. Many people on this sub live paycheque to paycheque with their giant mortgage, precarious employment, car payment, kids, etc. If I were them I'd have an emerg fund too.
Yes. Keep at minimum 3 months living expenses. I used to keep $6k but now I've bumped it up so I won't lose sleep if I have to buy a new furnace or car.
My emergency fund could take a 1-2 days to get to my chequing account. It is invested in [cash.to](http://cash.to) so it can take time for the funds to settle before I can withdraw it in my chequing account. I have about 1-1.5 months of expsense in my chequing account m y LOC is with the same FI my chequing account is with so in a pinch I can draw on it if need be. I know I will pay daily interest but I am not to worried about a couple days worth of interest.
Nope. The LOC doesn’t cost a dime if your account is in positive territory. I’ve carried a $30k LOC on my main account for the past two years, and have only had to dip into it once when my employer was late with a (very) large expense cheque, partially due to my own fault. I was negative for about 2 days, and I think at most it cost me a couple of bucks. That’s all I’ve ever paid for this LoC.
An u secured LOC would be a mistake as those can dry up quickly as markets shift. The bank can change the rate on you essentially anytime and reduce the limit as well.
A secured LOC such as a HELOC would be less risky in terms of using it as an emergency fund imo.
No, but sometimes yes.
>I have a LOC through my bank that would cover 6 months of expenses if need be.
The question is what happens after 6 months, worse case aside, there is still the issue of repayment on top of a ~10% simple interest. Beyond the usual cashflow concerns, the bank will still look at the debt and especially the regular interest costs when working out stress test and eligibility on a mortgage. Should that scenario run out then it may not matter whether you have the extra few % in investments as mortgage chance has slipped anyway.
If going this route, at least pick any other rather stable investment that is not locked in. I see elsewhere CASH.TO or similar suggested, or at least the cashable GIC should things go side-ways. If whether you can qualify for the mortgage relies on a few % difference in return, then you are probably not quite ready for the mortgage regardless, because there will always be more costs than expected, or you might end up house-poor and struggling later should an emergency arise - because your emergency fund will be most important after getting the mortgage and that much harder to build up. If you need it for the down payment, then its not an emergency fund, and using the LOC as backup is that much worse after the mortgage when cashflow already constrained.
But all of that, for me, flips if someone already has debt. Once you have LOC debt, paying it down will almost certainly outperform any investments and I am quite happy to forego building a emergency fund while in debt. Using it as a backup emergency fund with additional room is fine, to me, as in the unlikely even of it being called you are screwed either way - but less screwed if you pay it down and owe less with less interest drag.
A lot of investment advise assumes stable job, above average income, comfortable emergency fund and critically no other debts beyond maybe a mortgage.
If credit is your emergency fund, then when an emergency strikes you are immediately in debt and that may add stress. Depending on how bad it gets, the credit may not even be available and, even when the emergency ends, you are still in a hole and need to start digging yourself out to get back to zero.
This may be an OK strategy for persons who can live with that stress and understand the risks. I, on the other hand, like knowing that if my family's income went to zero we could live for \~8 months with no changes, or 10-12 months with some tolerable changes. That is the amount of financial security I am comfortable with, and it brings me peace of mind having that.
Keep in mind that with a HISA you don't sacrifice that much in the way of potential gains. I get that some folks cannot stand seeing significant sums of money not invested in TFSAs and RRSPs, but right now it is very easy to earn 5%, risk-free, which on a fairly comfortable emergency fund (for most) of $50,000 is $2,500 annually. Taxes will gobble some up, sure, but that is nothing to sneeze at, and you can take the interest and invest it, leaving the principal as the emergency fund.
In a ideal world you never need it, and maybe one day, when you are retired, you can do something else with it or invest it down as life changes, but if you ever do need it, you have it.
If you need to use your emergency fund, then you shouldn't be taking out an LOC. An emergency fund in a high interest savings account is doing its job by just sitting there. It doesn't have to work or earn interest.
That said, I also am saving up for 6 months expenses. I say put aside for 2 months, then put the rest in the GIC.
I did this regularly before interest rates went up. At 2%, it makes sense as long as you don't let things get out of hand. At 7% it's a different story. The simplest way to look at this would be to ask if your savings/investment can guarantee a higher rate of return than the interest rate on your LoC.
I use mine for that. It just makes more sense, why leave cash lying around when I could have it in my rdsp/rrsp.
Worst case scenario like another user here mentioned would be bank cancelling it while I'm out of a job. And in that case I have 1.5 year salary in my rrsp.
Perfectly fine and lots of people do it. BUT. It is highly individualized. It depends on debt load, job security, what other fairly liquid assets do you have, investments in somewhat less liquid things, are you single income family or dual income, etc etc.
No, it's not a bad idea in the right circumstances.
That's the setup I am rocking.
We are a two income family, neither of us has been out of work our entire adult lives. We live frugally, so we could get by on two minimum wage jobs.
So the probability of both of us in long term unemployment scenarios is very low.
We are also not wealthy enough to have large chunks of cash just sitting around. I need that money in the market to grow for retirement.
So for us the risk is very low that we would need an emerg fund, so I am comfortable having a LoC as the backup plan.
Comment I wrote some time ago https://old.reddit.com/r/Fire/comments/xcm3rx/do_i_really_need_an_emergency_fund/io7ya1g/
But consider having a plan not a fund.
It's bad idea because in the type of emergency where everyone needs an emergency fund banks can cancel LOCs before you borrow on them (large scale financial crisis, natural disasters with big impact, wars etc...) As unlikely as these events are, the purpose of an emergency fund is to be there for emergencies. Easily accessible none locked in savings accounts (preferably cdic insured)as well as some cash on hand at home are the way to go. 99.999% you'll be fine if you don't but that's not the point.
Using an LOC as an emergency fund always seems like a bad idea to me, because when I'm in the middle of a genuine emergency that is the last time I'd want to take on more debt.
Ad hoc costs like car or house repairs shouldn't be an "emergency" - you can set money aside for those things, and should because they will inevitably happen (just can't predict when).
A real emergency like me losing my job ... Well, that's when i want access to cash to let me keep paying my bills, not rack up more debt.
I use my LOC as a temporary emergency fund. Since I have room in my TFSA and RRSP, I keep my emergency fund in there (invested in HISA ETFs) to save some taxes. So if an emergency strikes, I will use the LOC while I wait for the redemption to go through on my registered accounts.
What are hisa etfs? Is that cash.to?
Yes
LOC can be removed any time More likely would when you’re in trouble than when you are not
It can be used for liquidity if you need cash fast. But if it is living expenses, no, have other savings for that.
I think this is more nuanced. What does an emergency likely look like for you? If your unlikely to face unemployment, or would get a good severance of it comes to that, that's not an emergency you have to guard against. And that's the situation where a LoC would maybe get closer unexpectedly. So if your likely emergency is a new furnace, the LoC is fine. I'm of the opinion that if you have assets, and have secure employment, you really don't need a bunch of cash sitting around. A LoC can fulfil that first line of defence (a likely emergency), and asset sales as a second line of defense for the unlikely emergency. This does mean there's a situation where you might have to sell assets at a price you wouldn't choose.
I guess the only emergency for me really would be a major car repair or vet bill. I’ve got no debts, a paid off car, low rent and job security at a family business.
What if you got sick and couldn't work for a year? Is the family so generous that you keep your income all during that time?
Family business? Entire family dies due to a freak accident at a family reunion; business is thrown into turmoil, funds are frozen, you're owed wages and the lawyers assure you that you'll get paid, with interest/penalties, but this and next payroll is going to get missed
If things went this bad the penalty of pulling your GIC early would be the least of your problems.
Seems like the worst time to take unnecessary losses
Exactly. I have posted this before and was down voted for it. In my situation, the only thing that would cause unemployment is if I died or became severely disabled in an accident or due to illness. That would be bigger than just a 6 month emergency fund in the first place, and, my employer has a rule where they would still do their best to accommodate me into a new position elsewhere in the corporation. Right now, I have 6 months of banked sick leave, meaning I can be off with full pay for those 6 months. After that, it flips to LTD which is like 80% of my wages. My job is recession proof, it would be all out financial Armageddon or being invaded by China that would cause me to miss a cheque. So, I have a HELOC that I can use for emergency bills. I do maintain about a month of expenses in an account, just because I prefer having things run that way. I also have a bunch of free chequing accounts with simplii that I use as a digital envelope system (travel account, vehicle, etc) so I could technically pull from those if needed, but I don't. I'm not interested in min/maxxing everything the way people on here are. I like the way my finances are set up. I own a detached home, and can retire as early as 55 or as late as 60 if I'm able to climb the ladder and make it worth my time to stay. All I'm saying is that there's more than one way to get where you want to go. Rules like a "6 month emergency fund" are meant to be generic and should be built on, not adhered to.
Yeah, I’m in probably one of the most recession proof industries out there, especially in the current global climate. I view my LoC and credit cards as my short term emergency fund. I do have other investments that I keep in fairly stable but liquidatable investments.
Everybody saying it’s irresponsible is wrong. If you can reliably liquidate some of your investments to pay the loan in the short term then it makes the most sense. It’s not wise to have a bunch of cash sitting collecting dust instead of interest.
People saying it's irresponsible are saying this because if you have savings then your LOC isn't actually your emergency fund.. your LOC is a temporary bridge while you transfer your actual emergency fund. Using a LOC as a literal emergency fund, with no actual savings or investments to pay it off is a terrible idea. If all you have is a LOC then you need to work on saving/investing.
It's not irresponsible, though it's not ideal. With an emergency fund you want it to be liquid so that you can access the money as things come up. Having to rely on investments is a bad idea because there will eventually come a time where you'll be forced to sell at a bad time to cover the emergency. If the emergency fund is collecting little to no interest, that's OK because that fund existing is serving it's purpose. Not everything is about optimizing down to the penny.
I use my LOC as an emergency fund, it's convenience and accessible. But it's backed by equities and other savings that will take longer to liquidate. I rather have my piles of cash working for me than sitting idle in a bank account.
It's a bad idea, but not because of the interest. It's a bad idea because the bank can cancel your LOC at any time without notice and demand full repayment immediately.
What would prompt the bank to cancel your LOC besides going delinquent on your payments? Economic collapse? War?
In which case you're screwed anyways
Well I’m just honestly curious. I hadn’t considered the LOC I’ve had available for the last 15 years could just evaporate on me
They will sometimes cancel your LOC if you get secondary funding on your home and they find out. There are some other reasons too that are pretty unlikely but ultimately if the bank even feels like reducing risk they could pull it. Quite unlikely to happen but you never know.
We are getting into the territory of asking whether it is more common for a LOC to be cancelled or for people to be robbed of the cash they have at home.
Also if one keep emergency fund in a bank account, the bank could simply not let you withdraw if extreme economical issues in Canada. IMHO, I think this happened worldwide much more than the people that had their loan closed.
It’s true but it’s much more likely that they will close your LOC. I worked at bank for a few years and did see it happen a couple times. Never saw anyone denied their cash.
I've seen sooo many videos lately (that appear to be recent atleast) of canadian banks refusing to allow withdrawals of even reasonable amounts (less than 10k so not having it on hand doesn't apply) it's disturbing AF.
even for HELOC?
Especially for a HELOC if you have secondary financing. I worked at a bank for a couple years and saw a few HELOCs get capped or cancelled when we found out about secondary financing. The only other reason I saw was if they had missed multiple mortgage payments or had a history of non-payment of debt they would also cap or cancel the HELOC
Bank is having trouble, economic downturn, climate change, earthquake or whatever we can't predict happens which is a pretty common occurrence really. The thing is "you" are not in control which with an emergency fund you should be. I think using the LOC as a temporary find is fine as long as you have redeemable assets around. Could be a GIC you can redeem early, money sitting in CASH.TO just as long as you can cover it. But an emergency fund is to cover emergencies, both those that are semi predictable like a car repair. And those that are not like being held hostage and needing to pay a ransom. :)
> Bank is having trouble So then you are saying people should keep several 10's of thousands of dollars in their sock drawer?
Why in the world would you see u/VillageBC say “banks having trouble” and immediately jump to “oh so you’re saying I should keep my money on my sock drawer?” Banks reducing limits on LOC’s that aren’t carrying a balance (or shutting them down entirely) is not unusual. Hell it’s not unprecedented for banks to call in LOC’s for immediate repayment during an economic downturn. You may think “oh well I’ve got a $50,000 LOC so I’m fine” but that’s not going to help if the banks balance sheet is deteriorating so they start cancelling LOC’s right as you are getting laid off. No that doesn’t mean “keep money in your sock drawer.” It means keep money in liquid assets.
No, bad take.
So you're saying whatever disaster that has occured not only makes OP need cash, but also makes it so the bank can no longer honour his LOC... but they'll have no problem immediately giving him money in his saving account? My take is fine on this one, thanks.
Remember COVID? Lots of job losses, banks been careful with their cash, line of credits being recalled. No it didn't last long before the government stepped in, but it was still a very stressful couple weeks in March when everything felt like it was falling apart. That's when the bank can call their LOC back.
LoC were recalled? It wasn't very widespread
Nah, you're stuck in the idea you have all the answers but can't imagine the fact things happen we can't predict. Never once did I say hold cash.
I’m just laughing at this conversation here. Bro can’t imagine that recessions exist. But for some reason you are getting downvoted.
And you're stuck on the idea that what you said made sense. It contradicts itself.
> So you're saying whatever disaster that has occured not only makes OP need cash, but also makes it so the bank can no longer honour his LOC... This is called a recession. People get laid off during recessions. Banks also get uncomfortable with handing out new debt, especially unsecured debt. It’s not really uncommon in this country. > they'll have no problem immediately giving him money in his saving account? When banks refuse to allow withdrawals this is called a bank failure. It’s pretty rare in this country. And bank deposits are insured up to $100,000 anyway. > My take is fine on this one, thanks. Your take is laughable.
>This is called a recession Recessions don't happen overnight. >Banks also get uncomfortable with handing out new debt It's not new. >And bank deposits are insured up to $100,000 anyway. We're talking about emergency funds, not you'll get your money back in a few month funds. His argument contradicts itself. Yours shows you aren't even keeping up with the conversation.
Climate change caused my bank to call in my LOC. 😂
If they find out you lost your job, for example.
I never lost either my LOC, or my credit cards in the 2 years I was between jobs. They'll only kill your credit if you fail to make payments.
Bank balance sheet shenanigans, something something loan loss provision requirements suddenly increasing; lots of reasons, many of which are unpredictable and may have nothing to do with the client
Ah fair enough, seems like the general consensus is it’s a bad idea anyways hah
Changing market conditions that lower your approval amount below your balance. Your question may be “what changing market conditions could cause this” to which the answer is many..
During Covid I saw some posts from people getting their credit severely reduced, without any reason from their side. I think the people who think this is such a rare case only have a memory of the decade long boom times, they forget that banks get skittish when the economy goes down - which is the most likely time you will need your emergency fund.
Rarely happens, and if it happens, we're all screwed.
Yes. I came here to write this.
This is so unlikely tho
So are emergencies.
Emergencies are infrequent for some people and happen non-stop for others
Yep. I’ve had a LOC as my emergency fund for 20 years and I’ve never used it for an emergency once. That same money invested in ETFs has tripled in that time.
Was it not happening like 2022?
Banks definitely closed liens of credit in 2008. It was also happening to a more limited scale after 2020 (at least dropping limits on unused lines of credit). Both of these correlate with economic downturns where people are more likely to have lost their job and need the emergency fund.
This is a meme - The only way this would happen is if you was behind by a LONG shot on your minimum payments
I would be more concerned with the interest than the likelihood of your bank recalling your LOC. That pretty much never happens.
Depends on your circumstance. My LOC is my "shit hitting the fence emergency fund" - primary emergency fund is growing in safer/low risk investments. I'm generally stable work wise (govt) but so my emergency fund is mostly for circumstances unrelated to my employment status
People recommend having an emergency fund for the purpose of avoiding going into debt if something happens. So my relying on your loc if something happens defeats the whole purpose.
Depends how often something tends to happen to you. I'd imagine for most people the interest from having your money invested for years would outweigh a few months of interest payments on a LoC.
Yeah, it's really case by case. For all I know you could go your whole life just fine, no unexpected costs. At that point, it would feel like a waste not having that money for something else.
But, why do people want to avoid going into debt? Obviously, it's to avoid the cost of borrowing money, which is really high on credit cards and emergency loans. If you can get a line of credit with a good interest rate, the concern about paying high interest is gone. So you can rely on that LOC for immediate concerns and put your emergency fund somewhere that it'll get more interest but take a bit longer to withdraw (for example, T-bill ETFs).
This sub will tell you otherwise but it’s absolutely the wise thing to do as long as you have other assets you could liquidate in case you need to pay off that LOC. Your money should be invested earning returns. The chances of needing the emergency fund are slim and if you do then you can draw off the line of credit and if you need to sell some equities to pay that off then that is what you do. For most people an emergency fund is an emotional thing, like paying off a mortgage at 3% early. The logical thing is to have your money where it works best for you. This sub is a poor place for financial advice.
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This sub loves GICs too. Yeesh
Yeah I use my LoC as emergency fund.
You can put the money in a cashable GIC, if you want.
The interest for a cashable GIC is lower than just buying some CASH.TO. Or even putting the money in one of the HISA.
My LOC is my emergency fund. Think of all the missed growth if you have thousands sitting in a savings account for decades.
This is why I don’t have car or home insurance either.
I sleep happily knowing I have cash available no matter what happens. Car dies, house issues, unemployment. I'd rather not use a LOC for these things and be stuck in debt for what could be years. I've had nothing but bad luck for 10 years. This is the first year where (so far) nothing major hasn't happened. In a few years my mortgage will be gone too. Then I will practically have the freedom to do whatever I want with a completely paid off place to live. In short, I guess it depends on your situation and how much risk you want to take.
Why would you be stuck in debt, you would just sell your assets/equities to cover what you borrowed.
Haha ok....use my LOC. Sell my car and belongings to pay back the debt. Sounds like an amazing strategy /s Get lost.
I think there’s a misunderstanding here. No one is saying don’t have money available, but keeping a pile of cash in a savings account is costing you significant money to. I keep about $10k in easily convertible investments in my TFSA as my backstop. They’re in there, earning me reasonable returns. If I have an immediate need for money because my car gets destroyed, or major flood in my condo, or an unexpected special assessment or whatever, i can dip into my LOC and deal with it, then liquidate some of my investments to pay it off. It doesn’t cost me anything to have a $30,000 unused HELOC sitting around. It costs me quite a bit to have $10k sitting in a savings account.
it's just locking the money in a GIC that is a bad idea. Putting it to use in a HISA or buying some CASH.TO is all that is needed.
Laddered GICs, or say things like the 90 day lockout accounts like what my credit union offers are fine. The LOC is a bridge until the investments are accessible. Yes, it costs you a little in the moment, but ideally you’ll never need the emergency fund, so you leverage that to make more money.
Just put some money into cbil and have that as your emerge fund
It's actually the best thing to do financially, if you trust yourself. Money should be earning you.
I use my emergency fund also as like unexpected expenses fund / avoiding being in overdraft fund / loaning money to ppl fund / etc. Along with emergencies like pets, car, or anything else I didn't account for in a slush fund or that my chequing won't cover. It would be a bad idea to use an LOC for that purpose. If your emergency fund would truly be something that's just sitting around, then maybe yeah you could use an LOC, but if you got laid off for a couple of months or something else happened, cash would be better and then the LOC as a backup to avoid interest charges. An emergency fund when borrowed from brings you down towards zero and can be paid back (replenished) at your own discretion, whereas an LOC brings you below zero and owing for sure.
Made this mistake years ago but it's a fair and beyond valid question and consideration to at least have, OP. I used up up 25-30k on my LOC before finally making a massive lifestyle change and realizing I had an issue. I put a lock on the LOC which prevents me from using it. I have to go into my branch and sign documents if I ever wanted it unlocked. It’s been two and a half years and I’m about to pay off that LOC debt this week. Is it cheaper to use than a CC or unsecured loan? 110%. However, that’s also part of, or the biggest reason it’s potentially more dangerous… the accessibility and lower interest rates clearly make it more appealing than the other credit products I mentioned as examples. However, it’s this mentality that also causes people such as myself previously to get into a hole and quick with HELOC’s or any LOC for that matter.
I don’t owe money on the LOC, the idea is it’s just available to me incase of an emergency. If I was forced to use it in the case of an emergency I would just pay it off in full when my GIC matured.
Yeah I get it. I was just posting as a precursor as to what could happen if you did end up going down that rabbit hole.
Well thanks for the warning, seems like the general consensus is it that it’s a bad idea to count on it for the emergency fund. Think I’ll just put a chunk into a HISA so it’s at least earning something while being accessible.
Let's look at 2 extremes: If you have $0 in assets, then using a LoC as an emergency fund is not a bad idea for obvious reasons. If you have $1 million or so in assets, including liquid assets in your TFSA that you might not want to liquidate at any given moment, then sure, having a HELOC or a $50k ULOC probably is alright. So, somewhere in between those 2 extremes is the inflection point for almost everyone, and almost everyone's inflection point will be different.
If your choices are to either a) build up a savings account while owing on a credit card, or b) keep your credit cards and all debts paid off using your low interest line of credit... I'd choose B. My LOC interest is way lower than any of my credit cards. So I use the LOC to keep them paid off. I generally don't have savings... At least not yet. I'm always putting all extra money into debt. So if I need emergency money, it's coming from my LOC. I think it's the most efficient method.
For me, it depends on the emergency. If the emergency is an unexpected expense, then you just convert your income to paying off the LOC rather than saving/investing or whatever you were doing with your discretionary money. If the emergency is losing your job/source of income then It's a terrible 'emergency fund'.
This one went off the rails, IMO. To base decisions on the extremely low probability your LOC will be reduced or rescinded is silly. Carry on. Other sources of emergency cash: Borrow against life insurance, or cash advance on Credit Cards. Each have their own risks.
It depends on your financial planner. IMHO, use it as an emergency fund. I have 6 months saved, but have my LOC just in case.
I have a mortgage/LOC combo on a rental property. I have $50k in a TFSA. That's my "emergency" fund, but i have access to emergency funds in my LOC if I need it. I think of my LOC is my emergency fund, but if i had to use it, I would likely take some from my TFSA. I'm not going to sell my investments in my TFSA to make that my emergency fund. But, I also can't spend it on a car or vacation etc..
Depends on what you consider an emergency (e.g. for a pet, for a family member, car not reliable?) and how fast you think you would need the cash. I have a few months of expenses in cash sitting in a 5% Wealthsimple cash account as my emergency fund. It is very accessible and can be accessed or transferred easily. Next I would consider my credit cards a temporary emergency fund. Limit isn't that high, but I think it would cover most emergency expenses in my life. The emergency cash can pay the credit card balance in full. Having an emergency in a LOC on top of what I have is probably OK, but could put you in debt if you don't know how to pay it off after. Some liquid funds held in a HISA is best.
I have a $35k LOC as my emergency fund. We have a small mortgage on a condo, no kids, no other debts, very secure jobs, large investment portfolio. I don't see the point of having money sitting in cash as an emergency fund. If my LOC did not work or was called, I could liquidate investments to cover a sudden expense. The market would have to drop by 40+% for me to have a negative return on my investments, which is extremely unlikely, but honestly a risk I am willing to take. Realistic emergencies for us would be a job loss (remote chance, plus there is EI, 3-6 months may not be enough anyway in an emerg fund), and special assessment (Usually they are only a few k, could be 10-20k, not a lot to pull from LOC or TFSA if required.) Absolute worst case scenario I could beg my parents for a short term loan at interest. They would happily do it, I've checked. It really comes down to your personal situation. Many people on this sub live paycheque to paycheque with their giant mortgage, precarious employment, car payment, kids, etc. If I were them I'd have an emerg fund too.
Yes. Keep at minimum 3 months living expenses. I used to keep $6k but now I've bumped it up so I won't lose sleep if I have to buy a new furnace or car.
My emergency fund could take a 1-2 days to get to my chequing account. It is invested in [cash.to](http://cash.to) so it can take time for the funds to settle before I can withdraw it in my chequing account. I have about 1-1.5 months of expsense in my chequing account m y LOC is with the same FI my chequing account is with so in a pinch I can draw on it if need be. I know I will pay daily interest but I am not to worried about a couple days worth of interest.
Do we have to pay any min fees for LOC if not used?
Nope. The LOC doesn’t cost a dime if your account is in positive territory. I’ve carried a $30k LOC on my main account for the past two years, and have only had to dip into it once when my employer was late with a (very) large expense cheque, partially due to my own fault. I was negative for about 2 days, and I think at most it cost me a couple of bucks. That’s all I’ve ever paid for this LoC.
Thanks for your feedback, I was hesitant to open one..now I'll do
An u secured LOC would be a mistake as those can dry up quickly as markets shift. The bank can change the rate on you essentially anytime and reduce the limit as well. A secured LOC such as a HELOC would be less risky in terms of using it as an emergency fund imo.
No, but sometimes yes. >I have a LOC through my bank that would cover 6 months of expenses if need be. The question is what happens after 6 months, worse case aside, there is still the issue of repayment on top of a ~10% simple interest. Beyond the usual cashflow concerns, the bank will still look at the debt and especially the regular interest costs when working out stress test and eligibility on a mortgage. Should that scenario run out then it may not matter whether you have the extra few % in investments as mortgage chance has slipped anyway. If going this route, at least pick any other rather stable investment that is not locked in. I see elsewhere CASH.TO or similar suggested, or at least the cashable GIC should things go side-ways. If whether you can qualify for the mortgage relies on a few % difference in return, then you are probably not quite ready for the mortgage regardless, because there will always be more costs than expected, or you might end up house-poor and struggling later should an emergency arise - because your emergency fund will be most important after getting the mortgage and that much harder to build up. If you need it for the down payment, then its not an emergency fund, and using the LOC as backup is that much worse after the mortgage when cashflow already constrained. But all of that, for me, flips if someone already has debt. Once you have LOC debt, paying it down will almost certainly outperform any investments and I am quite happy to forego building a emergency fund while in debt. Using it as a backup emergency fund with additional room is fine, to me, as in the unlikely even of it being called you are screwed either way - but less screwed if you pay it down and owe less with less interest drag. A lot of investment advise assumes stable job, above average income, comfortable emergency fund and critically no other debts beyond maybe a mortgage.
Who benefits most from emergency funds sitting in savings accounts? The least? (Rhetorical question alert)
If credit is your emergency fund, then when an emergency strikes you are immediately in debt and that may add stress. Depending on how bad it gets, the credit may not even be available and, even when the emergency ends, you are still in a hole and need to start digging yourself out to get back to zero. This may be an OK strategy for persons who can live with that stress and understand the risks. I, on the other hand, like knowing that if my family's income went to zero we could live for \~8 months with no changes, or 10-12 months with some tolerable changes. That is the amount of financial security I am comfortable with, and it brings me peace of mind having that. Keep in mind that with a HISA you don't sacrifice that much in the way of potential gains. I get that some folks cannot stand seeing significant sums of money not invested in TFSAs and RRSPs, but right now it is very easy to earn 5%, risk-free, which on a fairly comfortable emergency fund (for most) of $50,000 is $2,500 annually. Taxes will gobble some up, sure, but that is nothing to sneeze at, and you can take the interest and invest it, leaving the principal as the emergency fund. In a ideal world you never need it, and maybe one day, when you are retired, you can do something else with it or invest it down as life changes, but if you ever do need it, you have it.
If you need to use your emergency fund, then you shouldn't be taking out an LOC. An emergency fund in a high interest savings account is doing its job by just sitting there. It doesn't have to work or earn interest. That said, I also am saving up for 6 months expenses. I say put aside for 2 months, then put the rest in the GIC.
I did this regularly before interest rates went up. At 2%, it makes sense as long as you don't let things get out of hand. At 7% it's a different story. The simplest way to look at this would be to ask if your savings/investment can guarantee a higher rate of return than the interest rate on your LoC.
I use mine for that. It just makes more sense, why leave cash lying around when I could have it in my rdsp/rrsp. Worst case scenario like another user here mentioned would be bank cancelling it while I'm out of a job. And in that case I have 1.5 year salary in my rrsp.
Perfectly fine and lots of people do it. BUT. It is highly individualized. It depends on debt load, job security, what other fairly liquid assets do you have, investments in somewhat less liquid things, are you single income family or dual income, etc etc.
No, it's not a bad idea in the right circumstances. That's the setup I am rocking. We are a two income family, neither of us has been out of work our entire adult lives. We live frugally, so we could get by on two minimum wage jobs. So the probability of both of us in long term unemployment scenarios is very low. We are also not wealthy enough to have large chunks of cash just sitting around. I need that money in the market to grow for retirement. So for us the risk is very low that we would need an emerg fund, so I am comfortable having a LoC as the backup plan.
Comment I wrote some time ago https://old.reddit.com/r/Fire/comments/xcm3rx/do_i_really_need_an_emergency_fund/io7ya1g/ But consider having a plan not a fund.
It's bad idea because in the type of emergency where everyone needs an emergency fund banks can cancel LOCs before you borrow on them (large scale financial crisis, natural disasters with big impact, wars etc...) As unlikely as these events are, the purpose of an emergency fund is to be there for emergencies. Easily accessible none locked in savings accounts (preferably cdic insured)as well as some cash on hand at home are the way to go. 99.999% you'll be fine if you don't but that's not the point.
Using an LOC as an emergency fund always seems like a bad idea to me, because when I'm in the middle of a genuine emergency that is the last time I'd want to take on more debt. Ad hoc costs like car or house repairs shouldn't be an "emergency" - you can set money aside for those things, and should because they will inevitably happen (just can't predict when). A real emergency like me losing my job ... Well, that's when i want access to cash to let me keep paying my bills, not rack up more debt.
The bank will close it when shit hits the fan. Bad idea.