From this point forward, Scotia customers who want to add new money (without breaking their mortgage) will need to have, or convert to, a Scotia Total Equity Plan (STEP) mortgage.
The STEP is collateral charge financing that lets customers divide their mortgage into multiple segments, such as a long term or short term, fixed rate or variable rate, and/or a line of credit.
The upside here is that adding new money to a STEP lets the borrower select a whole new term and amortization for those new funds — if desired.
For example, if someone wants to add $75,000 to their 15-year $100,000 five-year fixed Scotia mortgage, the STEP lets them reset their amortization on that new money back to 25 years and choose an entirely different term, without needing to refinance. That can help keep payments and fees lower.
One downside is that most STEP mortgages are qualified at the five-year Benchmark rate, currently 4.99%. That means it may be harder to get approved when adding more money to a Scotia mortgage (versus certain other lenders that allow lower qualification rates on increases.)
Another potential downside is that increases will now require a collateral charge mortgage. While collateral charges save on legal fees when refinancing, they can also make it more expensive to switch lenders at maturity. That’s because collateral charges don’t qualify for free switches at most lenders, unlike traditional mortgages. Mind you, over two-thirds of Scotia customers are already in a STEP so this is a non-event for them.
It appears this news got out to some brokers ahead of time and prompted concerns about what Scotia was actually eliminating. David Stafford, Managing Director, Real Estate Secured Lending at Scotiabank, assured us: “In this case, the only thing that we’re not going to do going forward is blending new money into an existing mortgage.”
This change applies to all Scotia customers, including existing customers. Albeit, Scotia may need to make exceptions for some clients on older contracts.
The changes apply equally to all Scotia channels (retail and broker). Scotia cites regulatory, accounting, funding (securitization) and efficiency considerations as reasons for the change. That last one is especially key with margins so competitive. “We have to keep finding ways to make things more efficient,” Stafford explains.
This news does not impact blends and extends, where the loan amount stays the same. Those will still be possible on Scotia’s regular (non-collateral) mortgages.
Tip: For Scotia customers who need more money and want to stay in a non-collateral charge mortgage, one option is to add a collateral line of credit in second position, behind their non-collateral first mortgage. Speak to a broker or Scotia banker for more information.
Update – March 18, 2014: Scotia said it planned to roll out this change on March 8. But it has since been delayed–possibly until late March or early April.
Rob McLister, CMT (email)