September 5, 2017

Home equity plans may seem like a good idea at first blush but they are loaded against you, and a lot of it is in the sales pitch and the language.

Scotia Bank was one of the first Canadian Charter banks out of the gate with their Total Equity Plans, but other banks quickly followed suit.  Total Equity Plans are very similar in concept to HELOCs (Home Equity Lines of Credit) that allow you to have a revolving line of credit that is secured by the value (equity) of your house, the difference basically is that the HELOC is one product with one interest rate, while the Total Equity Plans allow you to have a series of separate products with different interest rates on each so the mortgage might have one rate while the credit card and line of credit has other rates.


The concept is sold as “providing a benefit to the consumer” by “allowing you flexibility” you can “borrow as much or as little as you need when you need it”.   The plan also “allows you” to have “preferred (lower) interest rates”, which all sounds very nice.

In setting up the Total Equity Plan your friendly banker was full of good news and told you that “you can avoid future legal fees” by “taking advantage” of the Plan, so if you needed to borrow more money in the future you would “not have to register a second mortgage”.  You might ask; “you mean if I want to borrow more money next year I don’t have to go through all that legal stuff again?” the banker praised you for your aptitude and said “yes, that’s correct”, in fact any borrowing you want or need, including a credit card of line of credit, “will not need further approval, you are already approved and at preferred rates”.

There’s an old saying about bankers that “they give you an umbrella when the sun is shining and want it back when it starts to rain”, and that pretty much sums up what happens both with HELOCs and Total Equity Plans.  The sales pitch is pretty much where the niceness ends.  You will eventually find that you have entered into what is in many respects a financial trap in that you are restricted to who you can borrow money from, and it is too easy to increase your debt load.  The law is stacked against you once you enter into either one of these contracts, wittingly or otherwise.


There is almost always a power imbalance for consumers when applying for loans of any description – it is some form of desperation that creates the need for the loan.   It is highly doubtful that anyone ever borrowed money when they didn’t need it, or at least believe they needed it, so there is a perceived urgency (or crisis) motivating the borrower to accept the terms that are placed in front of them.  In attending at the lender’s office insufficient time is ever offered to read through a set of standard charge terms.  Although clients are referred to legal counsel for Independent Legal Advice (“ILA”) it is not usually given in great depth and it is doubtful than any lawyer would take the time to read through, much less explain in detail, the standard charge terms of a mortgage.

Mortgage contracts, of any kind, are at best marginally negotiable.  Most of the terms in lending agreements are very rigid with the exception of the interest rate, which is probably the only negotiable part.  In essence the lender is holding pretty much all the cards.  The loan document was probably written in #6 font size to get it all on the page, and the language of standard charge terms is so complex that it baffles many sophisticated and well educated people.


For illustration purposes assume your house had been appraised at $250,000 and you qualified for a mortgage of up to 80% of the value of the property (or $200,000) but your existing mortgage is only for $150,000.  On the face of it you have $100,000 in equity, that all belongs to you, it’s your money.  But the umbrella people want to get in on that and that’s where the Total Equity Plan

Well if that didn’t sound pretty good – you fully understood that you could borrow more money when you needed it either on your mortgage, on a credit card or on a line of credit, no approval required and you get lower than posted interest rates.   To make all of this possible the bank registered a mortgage for $200,000 on your property – they only advanced you $150,000 but took $200,000 as collateral for the other, prospective, lending.

If you borrowed $10,000 on a line of credit it would be attached to the mortgage – in other words secured by the house.  The same thing would apply if you used a credit card, it too would be secured against the real property.  You probably wouldn’t notice because your mortgage would be treated as a “separate product” and paid for separately.  But if you ever found yourself getting behind and juggling payments on your credit card and/or line of credit the bank could commence a power of sale proceeding on your house, even though you remain up to date on the mortgage payments.


The bank will send the delinquent file to their collections group where phone calls and letters go out with demands to bring the credit card up to current.   If the arrears continued the bank will be in a position to consolidate all the debt issued under the collateral mortgage and take action under the Mortgage Act by commencing a power of sale.  That means unless you bring all of the arrears, including accrued interest and legal fees, up to date you will risk losing your house to a Power of Sale proceeding.  Eventually the bank’s lawyer will make application to court for a judgement against you and a writ of vacant possession in order to proceed to sell the house to recover the money you owe for the mortgage, the credit card and the line of credit as well as all of the legal fees.

Legal fees can be very costly.  Bank’s often use big city lawyers who charge out their time at Toronto rates, which are typically much higher than regional legal fees.  There also be home inspection or “occupancy check” fees, insurance fees and much more.  At the end of the exercise the bank would have sold your house, paid the realtor for the sale, paid the lawyer for costs of the action as well as for conveying the property, paid the maintenance guy for cutting the grass, paid themselves for the mortgage, the credit card and the line of credit and if there were any money left over it would be sent to you.  If there were a shortfall the bank would most likely sue you to try to recover it.


A bankruptcy would not (directly) help you because the credit card and the line of credit are secured against the house and as such are part of the collateral mortgage.