# Scotiabank STEP HELOC or construction mortgage?



## flowerbox (Dec 6, 2011)

I want to rebuild a custom home on my current property. Complete demo and build. No mortgage at the moment.

The HELOC puts a lien on the property... Would it interfer with the demolition?

The construction/draw mortgage seems to have a lot more overhead... Any advantages


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## donald (Apr 18, 2011)

I used a construction loan/draws a couple yrs ago and it work good.
One advantage of it is it keeps your feet the fire.Each draw is after milestone stages 1)frame up/roof covered 2)elec/plumbing/drywall/paint/mechanical 3)Cabinets/counter tops/flooring 4)outside finishing/final touch ups ect.

I got 4 draws and a time period of a yr,my 1st and last draws were the most,the bank is very much in contact and you need to submit a concrete plan with showing house plans,trades list,estitmated costs of each work performed(they have an idea but they cross referanced with me)

They are of the harder variety of bank loans you can get(@least i think they are)So you have to show your not a risk....Mine went off without a hitch and worked very well'

Im in the trrades business,the only thing the bank might investigate is if your competant not saying you are not but private sub contracting(home building)is best left to professionals....Most get there construction loans approved via there home builders company who is doing the job.


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## flowerbox (Dec 6, 2011)

Thanks for the reply, Donald.

The bank that I talked to said that a HELOC could be setup for 80% of the home property value whereas the progress draw mortgage was 60% of the land value.

Does that sound right? I would have expected to be able to get larger amounts using the draw mortgage option since since the loans are done throughout the construction process and not anytime like a LOC.


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## donald (Apr 18, 2011)

To be honest i dont know.In my situation i had bought my property outright and that of course work in my favour to secure a 100% loan i needed in the total est cost i built for(my land was "like" 25% down for total after completion)

I was wondering what the overhead was you were re:too on the construction loan comp to the heloc?

The nice thing with the construction loan is its more structured and it will keep you from over spending or going past budget(very easy to do)Since you will be financing it with the banks money....Its a more disciplined loan imo because with a heloc its more a lump sum?


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## flowerbox (Dec 6, 2011)

Hi Donald,

Thanks again for the reply. The overhead is that I will have to provide blueprints and pay for inspections at each stage before the next draw is released. That is so the bank can verify that the building progress is going as stated.

As you said the HELOC could in theory be treated as a lump sum and withdrawn all up-front. Which is why it seems much more flexible for the customer as, basically, I wouldn't have to go back to the bank again. 

The question then is why would someone choose the draw mortgage over the HELOC? The rates are similar (prime + 0.5) so it only makes sense if the amount available to be borrowed is larger for the draw mortgage, right?

I also own the property outright at the moment. To put some rough numbers on things comparable properties in the neighbourhood sell for $600K. The construction cost is expected to be in the $600K range. With the HELOC I can get 80% of the current value of the house (480k). Since that amount plus my liquid assets is enough to do the construction that sounds like the simplest and most appealing borrowing option to me.

The only problem with the scenario is I'm not sure whether the type of lien that a HELOC places on the property prevents the demolition from occurring or not? 

Basically, I've gotten two different answers from two different people at the same bank which makes me a bit hesitant to bite. City workers are notoriously slow so I don't want to have to worry about demolition/building permits being denied and having to be re-filed, etc. It's frustrating that I can't seem to find a clear answer to this question!


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