Residential Real EstateBorrow Once, Use Forever
Canadians can now make one application to borrow up to 75 percent of the
appraised value of their home and then distribute and redistribute that
value between a mortgage, personal loan, line of credit, VISA card and
overdraft protection anyway they like, anytime they like.
The Scotiabank Total Equity Plan is Canada"s first home equity
management program but is it really a step in the right direction for
Canadian consumers?
The Scotiabank"s Plan offers a "single lifetime borrowing package."
Apply once and then when you need additional credit you do not have to
reapply, provided you are within your umbrella limit. Plan features
include lower borrowing costs, VISA savings and a mortgage cashback
program for new mortgage customers.
In general, most homeowners with the right amount of income and
reasonable debt could qualify for a mortgage of up to 75 percent of the
value of their home. Mortgages with this ratio of loan to value are
known as conventional mortgages. According to our National Housing Act,
these mortgages do not require the expensive lender mortgage insurance
that high ratio mortgages do. So far there is nothing new about the
Scotiabank Plan.
The difference with the Total Equity Plan is that, as you repay your
mortgage principal, the amount you repay remains available to you
without having to arrange a new mortgage, a personal loan or an
overdraft. For instance, you could set up a Plan for a $187,500 lifetime
borrowing limit on your $250,000 home. If you arranged a $60,000
mortgage, you could distribute the remaining $127,500 between your VISA
card, overdraft protection, personal line of credit and car loan, saving
some equity for future use. As you paid off the mortgage, the repaid
principal would be available to redirect wherever you wished. With
traditional mortgages, once principal is repaid, you have to arrange a
new mortgage or loan to reuse that equity.
This all sounds great, but remember the bank would not offer this program
unless it allowed them to make profit with little risk. On the other
hand, borrowing on your home equity will cost you money and can put your
home at risk if something happens to your income. Remember, mortgage
interest and costs are only deductible when you borrow to invest or when
you run a home-based business.
Ignoring the advice of financial gurus who tell us to diversify may not
be wise. Putting all your financial eggs in one "basket" may limit your
financial flexibility down the road. If you become dissatisfied with
this lender, moving your business may be difficult, if not impossible.
Scotiabank is currently offering mortgage cash-back and preferred rates
for Scotiabank Value VISA under the Plan. The rebate of up to 3.25
percent of the new mortgage balance (some restrictions apply) and the
VISA rate of 7.25 percent are attractive, but what does the future hold?
Be skeptical and read the fine print. Get clear, written statements
explaining how you get out of the Plan and what it will cost you. Also,
ask for written, plain-language explanations of the borrowing and other
Plan restrictions. This lifetime borrowing limit will not suit everyone
but some homeowners may find it useful to gain some control over their
home equity.