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Scotia Changes its Progress Draw Mortgage

Scotiabank-MortgageThose needing financing to construct a new home may be interested to know that Scotiabank has modified its Progress Draw Construction Mortgage.

The good:

  • Clients now get more time to complete construction. Homeowners were previously allowed 12 months to finish. Scotia now gives them 15 months.
  • Payments are interest-only during the construction period to preserve cash flow.
  • There is no more application fee.

The bad:

  • Scotia no longer provides long-term rate holds for fixed or variable-rate “take-out” mortgages (A take-out mortgage is a regular mortgage that you arrange for when construction is finished. It replaces the interest-only draw financing.).Various other lenders, including but not limited to TD and RBC, offer rate holds of 1-year or longer. That gives you protection if interest rates run up during construction.

    A Scotia representative told us: “In our experience, by the end of the construction period, due to a number of factors, including the economic and rate environment, most customers select a different mortgage product than the one they selected at the beginning of the construction period. The changes to our policy are reflective of this customer behaviour.”

  • Scotia’s revised draw loan has an 18-month term and there is now a 3-month interest penalty if you complete construction and then terminate early to get your take-out mortgage elsewhere.Scotia says this penalty “replaces the application fee which has been eliminated.”
  • If you’re a broker, you may be irritated to know that Scotia has now limited the placement fee it pays on take-out mortgages. When a client early renews into a closed mortgage, brokers now receive 62.5% of what they’d normally get on a 5-year variable or fixed mortgage. That will not endear brokers to this program given all the extra time a draw application takes, and given that brokers aren’t compensated until the construction period ends.

Other national lenders with construction draw mortgages include TD, RBC, and Bridgewater Bank. Local credit unions are sometimes an option as well. A knowledgeable mortgage planner can compare the pros and cons of each.

Just be sure to pick a broker who has experience in draw mortgages. This kind of financing has more policies and hoops to jump through than a regular mortgage, and more can go wrong.

Rob McLister, CMT