As I mentioned previously, we’ve recently switched from a conventional mortgage at RBC to Scotiabank’s Scotia Total Equity Plan mortgage. We chose Scotiabank as they had the best rate at the time, but we chose their STEP as it will allow us to continually borrow 80% of our home equity.
You may be familiar with a Home Equity Line Of Credit (HELOC). This is a credit line that is secured by the value of your house, less your mortgage. Secured lines of credit normally provide a better interest rate than an unsecured LOC. For a regular HELOC, you would apply for a set amount, maybe $10,000 or $100,000, as long as the mortgage and the HELOC are less than 80% of your home’s value. The STEP, and other mortgages like it, give you this amount automatically. You can setup a flat amount like other HELOCs, or you can have a line of credit that automatically increases as you pay down the principle on your mortgage. Scotiabank had previously been criticized for not having an auto limit increase, you would need to call in every time to request an increase. In April they added the ability to have an auto limit increase which makes it a much simpler process.
The benefit to this readvanceable mortgage is that you can use the equity in your home as a tool for leveraged investing. As an example, if you’ve recently paid down $5,000 of your principle, the credit line would increase by $5,000. You can then invest with this available credit and the interest would be tax deductible, making it a better debt than your mortgage. Tomorrow we will look into this investment strategy some more as it is a great way for Canadians to convert their mortgage into a tax deductible investment loan.
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Hi Tom,
I’m under the same plan at prime rate. Scotia recently informed me they’ll increase it by 1% at the end of this year. They said this applies to all their secured lines. When I signed up I didn’t know they can change the rate on me at any time. They tell me they can! I broke my mortgage to get into this product thinking I pay prime while it’s low but now it will be prime plus 1%. I’m not too happy about this. Any suggestions/advice?
Ash,
I’ve heard of that happening to people with other HELOCs at other banks as well. It is unfortunate that as prime when lower, the banks raised the credit lines to prime+1. I would keep an eye on their website, and as soon as they start showing prime+0 again, give them a call to see if it can then be set back.
Of course they’re not likely to go back to just prime until the prime rate starts to go up at least another percent!