What is a Readvanceable Mortgage?
What You Should Know
- A readvanceable mortgage simplifies the process of borrowing from your home equity.
- It combines a conventional mortgage with a home equity line of credit.
- Over time as your home equity increases, you can automatically borrow more from the HELOC.
- There are no additional application fees or time spent applying for a HELOC.
What is a Readvanceable Mortgage?
A readvanceable mortgage combines a mortgage with a line of credit, which acts like a home equity line of credit (HELOC). As you make payments towards your mortgage, the credit limit of your line of credit will increase. This allows you to borrow more money as you repay your mortgage.
As standard with a HELOC, you’ll only need to pay interest on withdrawals. This means you’ll have an increasing amount of capital to quickly withdraw from whenever you have an investment opportunity or want to buy a big-ticket item.
How a Readvanceable Mortgage Works
A readvanceable mortgage links your mortgage payments with your line of credit’s credit limit. As you make mortgage payments, your loan amount from the HELOC increases. Most major banks allow you to borrow up to 65% of your home’s value. For example, imagine you owned a $500,000 home with only $100,000 in principal left on your mortgage. This means you only have debt worth 20% of your home's value. You would be able to readvance $225,000 from your home equity.
However, some credit unions, such as Meridian, allow you to borrow up to 80%. This means you could readvance $300,000 from your mortgage. Of course, any amount that you borrow will have to be repaid through your mortgage.
Hacking a Readvanceable Mortgage with the Smith Maneuver
Readvanceable mortgages are used in the Smith Maneuver, which allows you to save taxes by making the interest of your mortgage tax deductible. To do this, you will turn your mortgage into an investment loan by investing the line of credit portion of your readvanceable mortgage. To learn more about how you can use your home equity to invest and to make your mortgage interest tax-deductible in Canada, visit our Smith Maneuver tax strategy page.
When you make a mortgage payment, each payment is split into two portions. One portion goes towards your principal, while the other goes towards interest. The principal portion of the payment is what increases your HELOC’s credit limit, all without any home appraisals or extra legal fees.
For example, perhaps your monthly mortgage payment is $1,000, with $700 going towards the principal and $300 going towards interest. For mortgages that readvance automatically, this mortgage payment will increase your HELOC’s credit limit by $700, allowing you to re-borrow $700.
Some banks require you to have a bank account with them in order to transfer money between your mortgage or HELOC and your bank account. For those that don’t require you to bank with them, you can withdraw cash from your HELOC using options such as a HELOC cheque.
Why would I want to re-borrow money that I have paid?
Readvanceable mortgages give you flexibility for when you need it. You do not have to borrow money from the line of credit if you don’t need it. Instead, the credit is there for you to borrow at any time, such as if you have a sudden unexpected expense or need access to money quickly. Having a readvanceable mortgage already open allows you to not have to worry about applying for loans or fussing over a mortgage refinance when you already have access to your equity.
The Smith Maneuver involves turning your line of credit portion into an investment loan. By re-borrowing money that you have paid, you can transform your mortgage into a tool that you can use to save for retirement, all the while also saving on your taxes.
Productive Ways to Use your Home Equity
If you have home equity, some great ways to spend it include:
- Home improvements and renovations
- Buying a rental property
- Consolidating your debt into a low interest rate
- Buying a second home or cottage
- Paying for your children’s education
Readvanceable Mortgage Lenders
TD Home Equity FlexLine
The TD Home Equity FlexLine is split into two portions: a revolving portion and a term portion. The term portion is your regular mortgage. The revolving portion is a HELOC with a credit limit that increases as you make payments towards your term portion. The HELOC has no prepayment charges, which means that you can pay only interest or pay it all off.
The term portion can be fixed or variable, while the revolving portion is a variable interest rate based on the prime rate.
RBC Homeline Plan
RBC’s Homeline Plan combines RBC’s Royal Credit Line (line of credit) with a RBC mortgage. You can borrow from the line of credit at any time, and you can also have both fixed and variable rates for your mortgage. You can choose to have 80% of your mortgage having a fixed rate while 20% being a variable rate, or any combination that you choose.
Scotia Total Equity Plan (STEP)
Scotiabank’s STEP allows you to combine multiple products all under one plan. You can choose to have a mortgage, a line of credit, a personal loan, and credit cards all under STEP. STEP has automatic limit increases, which means that it automatically readvances and increases your line of credit or STEP-linked credit card's credit limit with each payment.
You can also choose to have a fixed mortgage interest rate, a variable rate, or both with the Long and Short mortgage.
CIBC Home Power Plan
CIBC’s Home Power Plan has automatic rebalancing, which means that your mortgage payments will automatically increase the credit limit of your line of credit. However, it can take up to 60 days after each mortgage payment for your credit limit to be increased.
BMO Homeowner ReadiLine
The BMO Homeowner ReadiLine allows payments made towards the installment portion to automatically increase the credit limit of the revolving portion of the plan. You can easily withdraw funds to borrow through online banking, ATMs, cash advances at a branch, or cheques.
National Bank All-In-One
National Bank's All-In-One allows you to choose a fixed, variable, or combined rate. Your line of credit's limit automatically increases as you make principal payments, and you can access your line of credit through online banking, at an ATM, or by using your debit card.
There is a fee of $7 per month for each account under the AIO plan.
Meridian Flex Line Mortgage
The Meridian Flex Line Mortgage is only available in Ontario, with automatic readvances monthly. The main advantage of Meridian’s Flex Line Mortgage is that Meridian isn’t a bank. As a credit union, they do not have to follow federal regulations that limit the HELOC portion of a readvanceable mortgage to 65% of the value of the home. Instead, Meridian’s Flex Line Mortgage allows you to borrow up to 80% of the value of your home through your HELOC. This gives you a higher credit limit than the other major banks once you have paid off your mortgage.
Meridian also isn’t required to conduct a mortgage stress test. While they still conduct it, failing the stress test doesn’t automatically disqualify you from getting a mortgage with Meridian.