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Discussion Starter #1
Hi all,

I'd like to get some input from you on my situation. Basically I am interested in paying down my mortgage faster using a HELOC via Scotiabank STEP. I learned about the concept from reading about Manulife One, but figured I can somehow emulate this with Scotiabank so that I don't have to transfer. I have to say however that the simplicity of M1 is attractive, even though their rates are sketchy (apparently).

My stats:

Regular checking account: $5k
High interest savings account: $48k
TFSA: $10k

STEP accounts:
mortgage 1: $60k @ 5yr/5.65% fixed (less than 2 yrs remaining)
mortgage 2: $58k @ 5yr/5.65% fixed (less than 2 yrs remaining)

Other accounts:
Personal line of credit: $17k limit, balance of 0.

My online STEP profile says I have ~$10k borrowing dollars available to me in the STEP but I have no account linked to it to access it. The overall limit is $133k.

What should I do?
a. Link my Personal LOC into the STEP? What would the new limit be? 27k?
b. Create a new LOC under the STEP? Should I cancel the personal LOC then?
c. Something else?

What is the monthly process once I have the STEP LOC? Currently I just dump any surplus into my high interest savings account. I've only made mortgage prepayments twice, that is, last two times I renewed my mortgage.
I've been trying to save up 8-12 months of expenses in case of unemployment, emergencies, as well as for vacation etc. I didn't really realize that a HELOC could still allow me to access the savings until now, and hence why I haven't made many prepayments.

What should I do with my savings? Dump into the HELOC and carry a huge positive balance? Prepay mortgage? This is where I'm not sure what to do next. If I prepay mortgage, the amount will appear as an increase in my HELOC will it not?

Also a good chance of moving in the next 2-3 years to a bigger place.

Thanks in advance!
 

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The manulife one is just putting all debt and savings in one account. They subtract your savings from the debt and you get your so called manulife one number. Picture a chequing account with overdraft, except the overdraft is your mortgage.

Dump that 48K savings on both of the mortgages and get rid of them. THey are compounding away and the bank is making lots of interest. Increase your payments on both by 15%, then do match a payment for both, then do two 15% lump sum payments. (This is the most scotia will do without penalty)

You've got 10K in TFSA for emergency and 5 k liquid in your chequing. Also if it makes you feel better, scotia will do miss a payment for every extra payment you put on the mortgage. So if you loose your job, this can be an emergency option. Once your mortgage is paid, that can be a form of insurance it self, if you were to loose your job.

I would assume that you have a retirement savings plan but didn't include it. If not, I would work on one as well as paying off the mortgage.
 

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Discussion Starter #3
I guess what I'm really after is whether it is possible to have my monthly surplus reduce my principle like Manulife can do. I think I just need to set up a LOC inside the STEP so I can access the equity, but can I have a positive balance on the LOC helping reduce interest over and above what you suggested? Essentially using the LOC as a checking account that accumulates like my savings account. ...Though now that I think about it I think I can link the savings account under the STEP?
 

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What is the interest rate on your LOC?
Can you get an LOC (HELOC or Personal) anywhere else for lower than Scotia?
What is the penalty for breaking your mortgage as of today?
What is the maximum annual pre-payment allowed on your fixed mortgage?

The only way I can think of paying your monthly savings into the mortgage (i.e. simulating the Manulife One) is to go with an open variable mortgage.
Every month, dump your monthly savings into the open mortgage.

But this requires you to break your current mortgage.

The other option is to leverage a LOC (at or around prime) and make lump sum payments into your fixed rate mortgage within allowed limits.
BTW, your fixed rates seem rather high.
I'm assuming you locked in your rate during early 2007?
Those days, 5% was the highest.
Yours is higher by at least 0.50%
 

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Assuming the HELOC is at Prime + 1%, it would currently be lower than your mortgage rate. So you're better off having the loan in the HELOC than the mortgage, for now at least. But before you start borrowing from the HELOC to pay down the mortgage, you should apply your savings. You seem to have more than enough to cover the 15% pre-payment maximum, but as Jungle suggested, you can also increase your payments by 15% and do the match-a-payment on each account. Next January, do these again to really pay it down quickly.
Look at it this way... you can earn a mere 2% (or less, depending on the bank) in the high interest savings account, which is further reduced by taxes. Or you can use the money to save yourself 5.65%. The only downside is that once you've paid down the mortgage, you can only get money back out via the HELOC, or by refinancing. But since you're planning to move in the next few years, you're probably going to want to build up your savings until then and wouldn't need to withdraw. Thus investing your savings into your mortgage is the most pratical and cost-effective option for you.

If you like the all-in-one concept that Manulife offers, you can eventually do something similar with your STEP account. Or alternatively, look into National Bank's all-in-one. Once your savings have been depleted (might take a while, as you have a lot), continue to maximize the mortgage pre-payments using money from the HELOC. Then use the HELOC account as your regular chequing/savings, and you will be effectively doing exactly what Manulife One does: applying all of your liquid cash toward reducing the interest you pay.
 

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^ To put that in perspective, if you are in a 35% tax bracket, paying the mortgage is equivalent to a 5.65%/(1-0.35)=8.7% pre-tax interest rate on a savings account. Even if you're getting 2% on your savings, you're throwing away 6.7% in pre-tax yield by repaying less than the maximum allowed.

Yes, some cash reserves make sense. But keeping tens of thousands in cash when you have outstanding debt is questionable. If you lose your job or whatever, you can always turn to your less liquid investments (ie, stocks/bonds) or HELOC to support yourself.
 

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Discussion Starter #7
Assuming the HELOC is at Prime + 1%, it would currently be lower than your mortgage rate. So you're better off having the loan in the HELOC than the mortgage, for now at least. But before you start borrowing from the HELOC to pay down the mortgage, you should apply your savings. You seem to have more than enough to cover the 15% pre-payment maximum, but as Jungle suggested, you can also increase your payments by 15% and do the match-a-payment on each account. Next January, do these again to really pay it down quickly.
Look at it this way... you can earn a mere 2% (or less, depending on the bank) in the high interest savings account, which is further reduced by taxes. Or you can use the money to save yourself 5.65%. The only downside is that once you've paid down the mortgage, you can only get money back out via the HELOC, or by refinancing. But since you're planning to move in the next few years, you're probably going to want to build up your savings until then and wouldn't need to withdraw. Thus investing your savings into your mortgage is the most pratical and cost-effective option for you.

If you like the all-in-one concept that Manulife offers, you can eventually do something similar with your STEP account. Or alternatively, look into National Bank's all-in-one. Once your savings have been depleted (might take a while, as you have a lot), continue to maximize the mortgage pre-payments using money from the HELOC. Then use the HELOC account as your regular chequing/savings, and you will be effectively doing exactly what Manulife One does: applying all of your liquid cash toward reducing the interest you pay.
Thanks, this seems like a comprehensive way of doing it. After further reading though, another user in the RedFlagDeals forum said that Scotia doesn't allow checking type transactions in the HELOC such as pre-auth debits and such (though they do give you checks to use), but would it be the same if I fake it by just keeping my regular checking account and drawing on the HELOC once a month (for my operating budget if you will) to pay utility bills as well as repaying the HELOC?

But then, if I have a monthly surplus, as I usually do, what do I do with it assuming I've maxed out my mortgage prepayments? If I was with National Bank I see how this would be taken care of automatically in an all in one. Where do I put the surplus so that it reduces interest with STEP?

I've also read now that using all liquid cash every month may not be a good idea since drawing it back out of a HELOC isn't really the same as cash. The HELOC can be reduced, frozen, or what if home values plumet like in the US? Any thoughts on that as a general concept or strategy? ...Though I guess NB and M1 would be subject to the same risks since they are essentially a neverending LOC too?
 

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I would talk to your bank about what kind of transactions are allowed in the HELOC before I would rely on some guy on the internet who said you couldn't.

If you have a step account and pay down your mortgage, the amount you pay down should become available on the HELOC. It's there if you need it. Unless your house is heavily over mortgaged I wouldn't worry about them lowering your HELOC personally.

I'd follow Jungle's recommendations and pay down as much as you can without getting any kind of penalty's.
 

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Most banks will let you use pre-auth debits and deposits with your HELOC. And most give you an ATM card too, so you can even use Interac or withdraw cash. It's been a couple years since I met with a Scotia advisor about STEP, but I seem to recall that they strictly require that you have a Scotia chequing account (one of the things I didn't like about it). So, even if you have to "fake it" by transferring what you need to pay bills over to a real chequing account, at least the transfers should be relatively easy.

Once you've already maxed out your mortgage pre-payment options, there isn't really anything useful you can do with STEP. The benefit just comes from paying down the expensive mortgage as fast as possible. Once you're already doing that, any surplus might as well be thrown into a high-interest savings account or a GIC which is setup to mature when you plan to buy a new house. If you had an M1 or NB all-in-one account, you probably wouldn't have any pre-payment restrictions since they are purely HELOC. Though NB (and maybe Manulife too) offers mixed all-in-one accounts where a portion is a fixed term mortgage and the rest is a variable HELOC - in those cases you would probably be limited to pre-paying the HELOC portion and maybe some of the fixed. But you're stuck with Scotia for 2 more years anyway so it doesn't really matter what the competition offers. It is very unlikely that breaking your current mortgage would be worth the cost.

You've already got enough saved cash to make the 15% lump sum pre-payment and double-up, and if your monthly surplus is enough to cover a 15% increase in mortgage payments, then you won't need to borrow a cent from the STEP line of credit. I was thinking more long-term, but since you've only got 2 years left anyway, you've got sufficient cash to optimize your mortgage without ever borrowing. So, you don't really need to worry about the risks of HELOC borrowing (and they are pretty low risks IMHO).

If you like the idea of using all your cash holdings to reduce the mortgage interest (I know I do), consider the NB all-in-one account in 2 years when you get the new house. The M1 doesn't really offer anything better and it has annoying fees.

Thanks, this seems like a comprehensive way of doing it. After further reading though, another user in the RedFlagDeals forum said that Scotia doesn't allow checking type transactions in the HELOC such as pre-auth debits and such (though they do give you checks to use), but would it be the same if I fake it by just keeping my regular checking account and drawing on the HELOC once a month (for my operating budget if you will) to pay utility bills as well as repaying the HELOC?

But then, if I have a monthly surplus, as I usually do, what do I do with it assuming I've maxed out my mortgage prepayments? If I was with National Bank I see how this would be taken care of automatically in an all in one. Where do I put the surplus so that it reduces interest with STEP?

I've also read now that using all liquid cash every month may not be a good idea since drawing it back out of a HELOC isn't really the same as cash. The HELOC can be reduced, frozen, or what if home values plumet like in the US? Any thoughts on that as a general concept or strategy? ...Though I guess NB and M1 would be subject to the same risks since they are essentially a neverending LOC too?
 

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Discussion Starter #10
Hi all...

Thanks again to everyone who responded, it has helped a lot, and I've learned a lot in the last few months. Here is an update on my situation, any comments or advice would be awesome!

I'm getting married in July 2011. My fiancee has $30,000 in student loans which I will help with. I want to simulate an all-in-one account using my Scotia STEP, being as aggressive as possible as follows:

  • Start date: ASAP
  • Graham gives Janna $25,000
  • Janna uses her $5000 savings plus $25,000 to pay all debts
  • Janna pays Graham $850/mo for rent (400, plus 430 what her loan payment was)
  • Janna pays Graham $300/mo excess (all her monthly excess)
  • Graham pays Janna’s $850 towards mortgage
  • Graham pays Janna’s $300 towards mortgage
  • Graham pays ~$500/mo excess towards each mortgage
  • Graham pays ~$17,000 cash for wedding
  • Graham’s savings = 50,000 – 25,000 – 17,000 = $8000 + TFSA = ~$18,000
  • Janna’s savings = 0
  • Pay expenses from LOC/HELOC, use high level of scrutiny
  • Debt-free in about 2 years with full equity
  • Risks: HELOC closing, job loss, slower progress due to other expenses and rising interest rates , no equity upfront, potential huge loss if wedding falls through (heaven forbid) or marriage fails
  • Mortgage interest savings M1: $23,900 + M2: $12,900 = ~$36,800
I have used the spreadsheets from vertex42.com to work out the details. There is one for each of my 2 mortgages:

Mortgage 1
Mortgage 2

Assumptions:
  • When it is time to renew in April 2012 I will get a 5yr open variable, so I entered that as 3.5% in the payment schedule but I know it could be higher at that time.
  • HELOC will be p+1 (I have to create a HELOC in my STEP still)
  • STEP currently shows $12,000 available credit
So tell me, am I out to lunch with this idea, or does it sound good? What do you think? Can we really be debt-free this quickly? Is it too risky to live off our HELOC (with firm discipline)? We will likely move when done, and maybe even use our current place as a rental property.

Other scenarios which take 1 year longer and save about $6000 less interest are (according to my rough calculations also using vertex42 spreadsheets):
  • pay $25,000 to the mortgage first, then direct all monthly excess to student debt
  • add $50,000 to the mortgage now to consolidate everything (which means $43,000+ in liquid savings)
  • pour all monthly excess into student debt until paid, then mortgage (which means $43,000+ in liquid savings)
  • Anyone got a better idea?
 
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