Re-advanceable Mortgage/LOC

[paul85s10355]

Hi Fellow Investors



I was recently reading CRE magazine and came across a section on readvanceable mortgages to capitalize in the equity in your home, can someone explain this further to me.



Thanks

 

[bizaro86]

Essentially, you can get a line of credit on your home up to 80% of the homes value (80% LTV). So if you owned a 100,000 house with a 70,000 mortgage, you could get a 10,000 line of credit. But wait, there's more (as they say on late night tv). Over time you pay down the principal on your mortgage. So maybe now you own a 100,000 home with a 65,000 mortgage. The available amount on your line of credit is 15,000. So the bank will "re-advance" the money that you've paid off.



Most of the banks have a trade name for this, mine is through Scotia, there's is called the Scotia Total Equity Plan, or STEP.



Regards,



Michael

 

[OlegP]

Just be aware that the readvancing is not always automatic. If I am not mistaken, Scotiabank does not automatically readvance the funds in its STEP program, meaning that you would have to apply for "readvancement" each time you build up enough extra equity in your house.

 

[Chris Veaudry]

Hello,



RBC Homeline does automatically readvance the funds as you pay down your mortgage. You can also divide the available credit into sub accounts for easier tracking. For instance, I have one account for personal use and one real estate investing. It's easier to track interest cost that way.



I don't work for RBC but just use their products.



Cheers,



Chris

 

[mortgageman]

The STEP can actually be set up to rebalance automatically but it's not the default set up. You have to ask for it to be set that way (or ask your broker to ask for it to be set that way) prior to signing at the lawyers. Also, it doesn't rebalance dollar-for-dollar like other products. I believe it rebalances in $5000 increments.

 

[mortgageman]

There are a number of lenders who have rebalancing mortgage/HELOC products. National Bank, Firstline are a couple.

 

[bizaro86]

[quote user=mortgageman]The STEP can actually be set up to rebalance automatically but it's not the default set up. You have to ask for it to be set that way (or ask your broker to ask for it to be set that way) prior to signing at the lawyers. Also, it doesn't rebalance dollar-for-dollar like other products. I believe it rebalances in $5000 increments.




My step doesn't rebalance automatically (I have to go to the branch and sign something, takes 5-10 minutes, but I have to go during branch hours, which is a pain). However, you can re-advance any amount. I just went recently and added an amount <$2000 to the LOC portion.

 

[freedom45]

Hello,



I am planing to apply for HELOC at Scotiabank. In my knowledge there are fees associated with it - appraisal fee and lawyer fees. Some people I talked to, mentioned that thhe bank can wave some of the fees - is that true? Any other thoughts on opening HELOC?



Thanks in advance.

 

[MarcoChim]

If you have your conventional mortgage with Scotiabank, you will have to switch the mortgage type to Scotia Total Equity Plan (STEP).



In order to do this, you will have to get an appraisal done. For example, if your house is appraised at $600,000 and your mortgage balance is $200,000, then they will give you a "Global borrowing limit" of $480,000 (80% LTV ratio of the appraised value).



$280,000 Available line of credit + $200,000 Mortgage balance = $480,000 Global limit



and YES, you will have to pay lawyer fees to discharge the conventional mortgage, and register the new STEP mortgage. Scotiabank also requires new title insurance for every mortgage, this will cost you another $100 - $150 on top of lawyer fees.



If you have good relationship with the bank, sometimes the will cover the appraisal fee up to a certain amount.



Cheers!

 

[Sherilynn]

If you are just getting a HELOC outside of your mortgage, you should only need to pay the appraisal fees (about $350 or so), and some banks will absorb that fee.



As for the STEP at Scotia, we refinanced our personal residence into a step. Scotia paid our IRD penalty ($14000) and in return we simply had to take a 5-year fixed at slightly higher than their best rate (still substantially below our old rate).



Our STEP is set up in 3 parts: personal closed mortgage, personal HELOC set at $28k, and another HELOC that we use for real estate which automatically readvances. It advances in $100 increments with a small minimum ($500 or so).



The only hitch is that it takes 45 days to advance. So we prepaid $26k in December, but we won't see the increase in the HELOC until February. That requires some planning.



As an added bonus, you can get the STEP Heloc as a VISA if you like, so you get the HELOC and a credit card attached to it.



And, this mortgage doesn't have to be only for personal residences. We have a STEP on one of our rentals as well.

 

[bizaro86]

[quote user=Sherilynn]The only hitch is that it takes 45 days to advance. So we prepaid $26k in December, but we won't see the increase in the HELOC until February. That requires some planning.





That's interesting. I wonder if the terms of a STEP are custom to the client/branch. I bought a property earlier this year using my step, and I didn't pre-pay them mortgage until a week before I withdrew the funds off the HELOC. The branch credited my certified cheque to the mortgage balance that day, and I signed a request to increase the HELOC (re-advance) at the same time. Is the 45 days a function of it being automatically re-advanceable? Because mine is manually re-advancing, but I can do it whenever.



Regards,



Michael

 

[Aneta]

Re-advanceable mortgages/HELOC products are ever-changing. Now most lenders will not do HELOCs on rental property. Also, there are nuances between the various re-advanceable mortgages/HELOC products, some are more logistical challenges than others - for example, how the money is moved, are payments automatic, does lender allow online payment with your regular chequing account, how many segments can you break your LOC into, for how much value does the lender register on title... A knowledgeable mortgage broker should be able to help with these specifics. Sometimes a smoking deal on the surface means inflexibility on the back end and a bookkeeping nightmare.

 

[johnsu]

Great insight Aneta. This info is priceless, cause really Aneta outlined the rules of the game: Don't expect something really great without giving back something in return. For example, in Real Estate investing, anyone who's done enough deals knows that any real estate deal that has Great terms probably doesn't have a great price or vice versa. You'll rarely if ever get a GREAT PRICE AND GREAT TERMS.

 

[Sherilynn]

[quote user=bizaro86][quote user=Sherilynn]The only hitch is that it takes 45 days to advance. So we prepaid $26k in December, but we won't see the increase in the HELOC until February. That requires some planning.





That's interesting. I wonder if the terms of a STEP are custom to the client/branch. I bought a property earlier this year using my step, and I didn't pre-pay them mortgage until a week before I withdrew the funds off the HELOC. The branch credited my certified cheque to the mortgage balance that day, and I signed a request to increase the HELOC (re-advance) at the same time. Is the 45 days a function of it being automatically re-advanceable? Because mine is manually re-advancing, but I can do it whenever.



Regards,



Michael




Yes, ours is automatic. If we wanted the funds sooner, we could manually request the increase, but that sounds an awful lot like work. It's easier for me to shuffle money over internet banking. ;-)

 

[bizaro86]

[quote user=Sherilynn]Yes, ours is automatic. If we wanted the funds sooner, we could manually request the increase, but that sounds an awful lot like work. It's easier for me to shuffle money over internet banking. ;-)



I see. So if the 45 days was becoming an issue you could take the time to go to the branch.



We declined the automatic re-advance, as they wanted a monthly fee to do it, which seemed high compared to how often we actually need the money and therefor go to the branch (which isn't often).



Regards,



Michael

 

[Sherilynn]

Yes, the fees vary greatly. Another bank has a readvanceable mortgage product that may have better met our needs, but I couldn't see past the fees. Large monthly fees plus transaction fees for all sorts of things.



The way I see it, a bank is making thousands of dollars a year on my mortgage as it is, so on principle I take issue with them charging an extra hundred a month in silly fees, especially when a similar product is available with no extra fees.



It seems rare for bankers to see the bigger picture, and instead they focus on making their extra dollars in fees and penalties. By not nickel&diming me with fees and being somewhat investor-friendly, Scotia has gained more of my business thereby earning a great deal more than they ever would have got from extra fees.