Hi everyone, I’m Sabrina, a real estate lawyer at Varity Law. Many people have a misconception, being that your line of credit is separate from your mortgage. While this may be the case when you make online or in-branch payments, it is not the case from a legal perspective. Both the mortgage and line of credit portions of your loan is registered as a single amount on your real estate property.
This means that when you sell your property, your lawyer must ask the bank to remove both loans from the property – your mortgage and your line of credit. Whereas your mortgage have monthly deductions, your line of credit has no fixed withdrawal dates. You decide when you want to withdraw, and you can do this at any time. However, it takes banks usually a whole month to update the most recent withdrawal onto your bank statement or discharge statement.
This means that when your lawyer tells the bank, “Hey, my client is selling the property, give me the latest discharge/bank statement showing the most recent balance,” the banks usually can only provide a statement from a month ago. So, if you made a withdrawal less than a month before your closing date, the statement provided by the bank would be inaccurate. This means that after you sell your house, you may be hit with a nasty letter from the bank – telling you to make up the difference. By using your sale proceeds, your lawyer would have only paid the balance from your previous statement that did not contain the latest withdrawal. Since you took out more money, now you must pay it back immediately. The banks will usually be very aggressive when this happened, as the only collateral securing your line of credit, being the house you just sold, is no longer yours.
To prevent this, sometimes banks would cancel your line of credit as soon as they receive a discharge statement request from your lawyer. But as most lawyers don’t make this request typically 1-2 weeks before closing, you may still run into the same issue.
Bottom line – my advice is to not make anymore withdrawals from your secured line of credit a month before your sale closing. Otherwise, the banks may be driven into a state of panic due to losing their collateral before the debts are fully repaid. And they usually respond by sending aggressive legal letters and stacking on the interest penalties.
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