How to Choose the Right Lending & Investment Products

How to Choose the Right Lending & Investment Products

This post was written in partnership with Victoria Ko.

Banks offer a variety of products such as savings and checking accounts, loans, and investment accounts. Details and specifics will vary but, whatever your needs are, odds are your bank will provide a solution. But how do you know what you need? And if the solution that is offered fits your specific needs?

We’ve created this guide to provide an overview of two categories of products that you may come across: lending and investing tools. Lending products or loans allow you to borrow money in order to make a purchase (or purchases). Investing products help you grow your wealth more rapidly.We’ll begin an overview of two common loans: mortgages and lines of credit.

Banks offer a variety of products such as savings and checking accounts, loans, and investment accounts. Details and specifics will vary but, whatever your needs are, odds are your bank will provide a solution. But how do you know what you need? And if the solution that is offered fits your specific needs?

We’ve created this guide to provide an overview of two categories of products that you may come across: lending and investing tools. Lending products or loans allow you to borrow money in order to make a purchase (or purchases). Investing products help you grow your wealth more rapidly.We’ll begin an overview of two common loans: mortgages and lines of credit.


Mortgages

These specific loans are used to buy a home or property. They are extremely common – in the US, over 60% of homeowners have a mortgage

How does the mortgage process work?

Banks will assess the value of a property and determine the interest rate and loan amount based on a variety of factors. These include income, spending habits, credit score and most importantly two ratios, the gross debt service ratio and the total debt service ratio. Together, they will determine your mortgage eligibility.

Lines of Credit

Also referred to as “LoCs,” these are preset borrowing limits that can be drawn on at any time. You can take money out as needed until the limit is reached, and as you repay, you can keep borrowing (if your line of credit is open). As long as you don’t exceed your borrowing limit, you can keep drawing upon an LOC. While the main benefit of an LOC is flexibility, they have some severe drawbacks as well. Penalties for late payments are steep, interest rates are high, and if you’re not careful, you may overspend.


In addition to offering lending products, many banks offer investment accounts to help you accumulate wealth. 

Yes, that is right! You can open investment accounts with the bank. 

If you decide to open an investment account, make sure to understand what you are eligible to open and what products can be invested in those accounts. Make sure you state your citizenship status when you speak to the representative at the bank, as he/she will be able to guide you. 

Note, there are two major types of investment accounts- taxable and tax-free. Taxable accounts are funded by after-tax dollars and receive no special tax treatments. Tax-advantaged accounts allow you to deduct your taxes based on contributions made to these accounts, up to a limit.  Each account listed below will have a specific income limit and withdrawal requirement, but in general as an investor you can purchase any investment offered by the banking institution. 

The limitation with the banks is the ability to purchase other positions not listed, so if you are a savvy investor, it is best to also consider a brokerage account to hold other instruments.

Here’s a list of accounts available in Canada

  • Cash Account: Investments are made with after tax-dollars. Any capital gains made on investments must be claimed as income.
  • Tax Free Savings Account: Investments are made with after tax-dollars, however there is a contribution limit per year and any capital gains made on investments is tax free.
  •  Registered Retirement Savings Account: Allows the investor to accumulate money for retirement. Contribution limit found in Notice of Assessment.
  •  Registered Education Saving Plan: An investment vehicle which allows guardians to save for their children’s post-secondary education.

Here’s a list available in the US

  • Roth and Traditional IRAs: IRA is an acronym for “Individual Retirement Account,” and both Roth and Traditional IRAs allow you to contribute to your retirement with either tax-free growth, or on a deferred-tax basis. 
  • 403(b): Retirement plans for certain employees of public schools and tax-exempt organizations.
  • 529 Plans: A tax-advantaged college savings plan. 
  • High Yield Savings Accounts: A type of savings account that is specifically designed to offer high yields, or interest rate, to help you accelerate your savings goals.
  • Custodial accounts: A savings accounts established by an adult for a minor.

We leave you with this note:

Do your research and make sure you understand all of the products that are available. If you feel overwhelmed – ask questions! That’s what customer service is there for. 

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