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Borrow Once, Use Forever

Written by Posted On Tuesday, 01 June 1999 00:00

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.

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PJ Wade

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