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!
What happenes to the amortization tables? If my house was to be paid off in 15 years, but I tap into $5K of STEP equity, does this mean it will take years longer to pay off the mortgage? Can I take out the $5K and increase my bi-weekly payment so that it’s paid off at roughly the same date?
Rob, the mortgage portion is still paid off at the same rate. In your example, yes the mortgage would still be paid off in 15 years, that doesn’t change. Of course you’ll have the $5000 that still needs to be paid off. Think of them as two (or more) seperate buckets. You have a mortgage that’s declining and credit line with an available limit that’s increasing at the same time.
That’s why I want to use this for investing. If I have say $1000 to invest, I’m best off to pay down my mortgage by $1000 first, then borrow that newly available $1000 from the credit line to invest. I still have $1000 in investments, and I still have the same level of debt. But since that $1000 of debt is now for investing, and not part of the mortgage, it’s tax deductible. For more details, check out my post on the Smith Manoeuvre.