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Banks get creative with home equity loans

If you want to see banks at their most creative, try asking to borrow some money with your house as collateral.

You want a home equity line of credit? No problem. A refinanced mortgage? Sure. You'd like both mixed together so that you have more flexibility in paying back your debt? At some banks, this is easy. It's even possible at one bank to get a home equity credit line that you can gain access to through a Visa card.

Home equity borrowing has an obvious advantage for consumers in that it's done at rates that can be many percentage points lower than conventional lending. The banks like this kind of lending because it helps keep clients in debt.

The ins and outs of home equity borrowing were covered in Globe Investor last Saturday (check the archive at Now, let's look at the innovations financial institutions are introducing in this area.

One of the most sophisticated home equity borrowing products out there now is Bank of Nova Scotia's Scotia Total Equity Plan, or STEP. With STEP, you set up a single borrowing plan that lets you access as much as 75 per cent of the equity in your home in a wide variety of ways.

Your existing mortgage would be part of the plan, but you'd have the flexibility to disperse your borrowing into as many as 11 different products, including credit lines, loans, mortgages, a low-rate Visa card and an overdraft protection for your bank account.

You can see the versatility of STEP in the fact that it allows you to divide the mortgage on your house into as many as three parts. For example, you could lock in part at a negotiated five-year rate and let the rest float with a variable-rate mortgage.

A noteworthy STEP feature is a home equity line of credit that you can access through a Visa card. While a standard Visa might carry an interest rate in the range of 18 per cent, this one can be as low as prime, now 4.5 per cent.

Another bank that gives you choices on how to do your home equity borrowing is HSBC Canada. The bank's Equity Power product is like Scotiabank's STEP in a couple of ways, one being that it lets you break your mortgage into separate components, each with a different interest rate.

Another similarity is the ease with which you can create separate borrowing accounts so that your tax-deductible borrowing is segregated from your non-deductible borrowing. If you borrow to invest in a non-registered account, the interest on your debt would be tax-deductible.

A less elaborate approach to home equity borrowing is taken by TD Canada Trust, which allows customers to keep part of their home equity borrowing in a floating rate line of credit (pegged to the prime rate) and the remainder in a fixed-rate mortgage. The bank reports that about 90 per cent of its customers have chosen to ride out volatility with a floating rate.

Bank of Montreal will also let you combine a credit line and a mortgage refinancing, while Royal Bank of Canada and Canadian Imperial Bank of Commerce keep these products separate.

Yet another twist on home equity borrowing is the Manulife One account from Manulife Financial. Here, your mortgage is held in a special hybrid borrowing/banking account where you're automatically able to borrow any difference between your outstanding balance and up to 75 per cent of your home's value.

The flip side here is that any money held in your Manulife One account goes to reduce your total outstanding mortgage and borrowing principal. The more money you cycle through your bank account on a daily basis, the less interest you'll pay on your debt over its lifetime.

While it's easiest to borrow against your home equity using the same lender that holds your mortgage, it's not essential. Many institutions would be happy to welcome you as a borrowing customer, although they'll likely urge you to bring your mortgage over.

One last thing -- fees. Unless they have a promotion on where they pay legal and/or appraisal costs, lenders will try to get you to pay these charges. It's all negotiable, so don't just acquiesce.

With home values rising, homeowners may find themselves with new home equity to borrow against. But what if home prices fall?

In a worst case, homeowners could find that the debt from their mortgage and home equity line of credit are worth almost the same as or even more than their shrunken equity.

You can guard against this by being reasonable with your home equity borrowing and not taking your debt to the maximum. If the worst happens, though, you'll likely find that your bank's main concern is that you keep paying what you owe on your debts. As long as that happens, you should be all right.

© The Globe and Mail

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