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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Tom Drake is the owner and head writer of Canadian Finance Blog.
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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?
Identical situations happened to me. At first, I switched from no fee chequing at Coast Capital to Scotiabank who told me they would waive all transaction fees…no, they didn’t. And then I remortgaged, with them! and they tagged me with a $12,000 penalty, which no one told me about. They specifically said no penalty. Then AFTER I sign real estate papers, my notary informs me of the penalty, I go back, and there’s “Nothing they can do”…that’s the chant of Scotiabank. “there’s nothing we can do”. Now, I have sold my house and likely won’t get a mortgage for a while, and they’re penalizing me $7,900 when they told me earlier, on paper, that it was about $4,500… This bank is too big and is out of control. But they have great ads with hockey players…
I’m pulling all my assets from Scotia, and moving on. Done being lied to. So frustrating!
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.
This story happens to many people, thank you for posting, it will help. This is why it is important to find a Real Estate company that explains all aspects of the mortgage or home equity process.
Does anyone know whether this program allows to add it back to the mortgate the amount if needed. (i.e without going through another refinancing and cost)
I have $320000 approved mortgage and $250000 Mortgage balance and $70,000 LOC. Can I take $70,000 out and add it to mortgage and make it $320000 with a refinance. Please advise.
I received a lot of broken promises from Scotiabank, and they’re not consistent. This is hands-down, the worse bank I have ever dealt with for integrity. Ah, they have none. But they have great ads with hockey players…duh!