Let’s talk a little about mortgages. Specifically, the Scotiabank STEP mortgage.

This bad boy is a little different than a normal mortgage. Regular mortgages are for a fixed amount for a certain period of time, usually at a fixed interest rate. It’s very possible to get a variable rate, but that rate is locked to prime. It only goes up when prime goes up, and down when prime falls. It’s the mortgage equivalent of that friend who won’t leave you the hell alone.

The STEP mortgage combines a line of credit and a regular mortgage. Let’s take ourselves a closer boo, shall we?

The skinny

The Scotiabank STEP mortgage is for anyone who has at least 20% down on their house. Ideally, you’d want a little more.

Here’s what happens. Every time cash goes into the account, the value of the mortgage goes down that amount. When you spend money, the mortgage balance continues to creep up until you put more money back in the account.

As you pay down the mortgage, the borrowing limit stays the same. So if you need to borrow against the house, you can do so, without approval.

The mortgage is split into two parts. There’s the mortgage part and the line of credit part. You can then choose how your payments are structured, but you’ll have to pay at least the interest on both.

It really makes sense for a certain kind of borrower. Say you have 50% down on a house because you’re a personal finance STUD AND/OR STUDETTE. But that’s all the money you have. Common wisdom would say borrow more and leave some money aside for an emergency fund. But with the STEP mortgage, you wouldn’t have to. You’d automatically be approved to borrow up to 65% of the value of the house through the line of credit portion of the mortgage.

Be prepared to pay a little more for the privilege of having access to your equity, however. A closed three-year term currently costs 3%. A closed five-year term costs 2.9%, while an open five-year term costs 3.5%. These are all variable rates for the mortgage part of the loan. You’ll pay normal HELOC rates on the line of credit part.

Fixed-rate STEP mortgages are subject to Scotia’s normal fixed rates. A five-year fixed mortgage costs 4.49%, although I’d suspect that’s quite negotiable if you have good credit. You’ll also have to pay an appraisal fee, which is $300. And again, the line of credit part of the loan will be a floating rate, probably prime + 1%.

The problems

A good ol’ STEP mortgage isn’t all lollipops and blowjobs though. There are a few negatives you need to know about.

There are additional fees if you were to transfer out of the STEP mortgage and into something with a different lender. It’s a collateral charge mortgage, which gives the lender the ability to easily add more money to it. The negative part of a collateral charge mortgage is it’s more complicated to assign it to another lender. If you transfer it to another lender, be prepared to pay an additional fee of between $300 to $500, maybe even more.

Although most of the time the receiving lender will cover that fee. Finally, somebody pays you for something. TAKE THAT, DAD. I TOLD YOU I’D AMOUNT TO SOMETHING.

You’ve also got to transfer all your banking to Scotiabank, and although I can’t find any evidence saying you’ll have to take out an expensive month-to-month banking package, that’s usually a requirement for such a thing. At least it is for the comparative Manulife product.

It’s also more expensive to borrow using lines of credit. One-year fixed mortgages can be had for under 2% for a well-qualified borrower. HELOC rates are much higher.

Should you do it?

This mortgage is a decent deal for people who are looking for a very specific kind of loan and for those of us who would like a little greater flexibility. It also makes sense for people who want the flexibility to borrow at any time, no matter what.

But it comes with a few limitations. It’ll cost you a higher interest rate than comparable products, and most mortgages offer the ability to pay down 20% of the original principal each year, which should be enough for most people.

Ultimately, I think it’s a little too complex for most people, as well as being too expensive. You’ll probably do better taking short-term fixed mortgages or just a standard variable one with decent prepayment privileges.  There’s no reason to make life needlessly complicated. You’ve got your screwy relationships for that.

Tell everyone, yo!