Readvanceable Mortgage in Canada

  • davidj
  • July 12, 2024
couple applying for readvanceable mortgage

In Canada, home financing comes with various mortgage options for homeowners to choose from. One of the innovative solutions that has gained popularity now a days is the readvanceable mortgage. This type of mortgage offers unique benefits and flexibility, making it a viable choice for many homeowners.

What is a Readvanceable Mortgage?

A readvanceable mortgage, also known as a re-advanceable or flexible mortgage, is a combination of a traditional mortgage and a home equity line of credit (HELOC). As you pay down your mortgage principal, the available credit on your HELOC increases, allowing you to re-borrow the funds without needing to apply for a new loan. This structure provides ongoing access to your home’s equity, offering unparalleled financial flexibility.

Additionally, interest payments on readvanceable mortgage can be tax-deductible as per Canadian tax strategy known as the Smith Maneuver, making it an attractive option for homeowners in Canada. As long as the reborrowed funds are used for investment purpose, homeowner can leverage the benefit of tax deduction from income tax.

The Smith Maneuver

The Smith Maneuver is a legal tax strategy developed by Fraser Smith; a financial planner based in Vancouver Island, Canada. He released this financial planning through his book in 2002, the maneuver allows Canadian homeowners to convert the non-tax-deductible interest of a traditional mortgage into a tax-deductible interest of an investment loan.

Smith refers to this maneuver as debt conversion techniques that involves repeatedly extracting equity for investment purposes, ensuring the interest accumulated on this extracted equity remains tax-deductible. This systematic reinvestment and tax optimization create a cycle that potentially accelerates the mortgage payoff and grows investment portfolios.

How Does a Readvanceable Mortgage Work?

Here’s a step-by-step breakdown of how a readvanceable mortgage operates:

  1. Initial Setup: This mortgage typically consists of two components: the mortgage portion and the HELOC portion. The mortgage portion is used to purchase the home or refinance an existing mortgage, while the HELOC portion is available as a line of credit.
  2. Principal Repayment: As you make regular mortgage payments, a portion of each payment goes towards reducing the principal balance of your mortgage.
  3. Increasing HELOC Limit: With each mortgage payment that reduces the principal, your HELOC limit automatically increases by the same amount. For example, if your monthly mortgage payment reduces the principal by $1,000, your HELOC limit will increase by $1,000.
  4. Re-borrowing: You can access the available credit on your Home Equity Line of Credit at any time for various purposes, such as home renovations, debt consolidation, or emergency expenses. The flexibility to re-borrow funds as required makes the readvanceable mortgage a viable choice among homeowners in Canada.

Benefits of a Readvanceable Mortgage in Canada

  1. Flexibility: One of the most significant advantages of a readvanceable mortgage is the ability to re-borrow funds without doing application for a new loan. This flexibility is particularly useful for homeowners who anticipate future expenses or investment opportunities.
  2. Cost Savings: By using your HELOC portion to cover expenses, you can avoid the higher interest rates associated with credit cards or personal loans. This can lead to substantial cost savings over time.
  3. Debt Management: A readvanceable mortgage can be an effective solution for managing and consolidating debt. You can use the HELOC to pay off high-interest debts, such as credit card balances, and reduce your monthly payments by lowering interest rates.
  4. Investment Opportunities: The ability to access your home’s equity can provide opportunities for investment in property, stocks, or other ventures. This can help you grow your wealth over time while leveraging the equity in your home.
  5. Emergency Funds: Having a HELOC as part of your readvanceable mortgage ensures that you have access to funds in case of emergencies, such as unexpected medical expenses or major home repairs.

happy couple leveraging readvanceable mortgage

Considerations Before Opting for a Readvanceable Mortgage

While a readvanceable mortgage offers numerous benefits, it’s essential to consider certain factors before deciding if it’s the right option for you:

  1. Discipline Required: The ease of accessing funds through a HELOC can be tempting, leading to potential overspending. It’s crucial to exercise financial discipline and use the funds wisely to avoid accumulating excessive debt.
  2. Interest Rates: While HELOCs typically offer lower interest rates than credit cards, they are often variable rates, which means they can fluctuate with market conditions. Ensure you understand the terms and potential impact of changing interest rates.
  3. Fees and Costs: Setting up a readvanceable mortgage may involve additional fees, such as appraisal fees, legal fees, and administrative costs. Be sure to factor these into your decision-making process.

How to Get a Readvanceable Mortgage

If you’re considering a readvanceable mortgage, here are the steps to get started:

  1. Assess Your Financial Situation: Determine your financial goals and assess whether a readvanceable mortgage aligns with your needs. Consider factors such as anticipated expenses, debt management strategies, and investment opportunities.
  2. Research Lenders: Not all lenders offer readvanceable mortgages, so it’s essential to research and compare different financial institutions. Look for lenders with competitive interest rates, flexible terms, and a solid reputation.
  3. Consult a Mortgage Advisor: Reputed mortgage advisors like Turnedaway.ca, Homeequityloans.ca and Mortgage Broker Network can help you to understand the intricacies of readvanceable mortgages and guide you through the application process. They can provide personalized advice based on your financial situation and goals.
  4. Apply for Pre-Approval: Once you’ve chosen a lender, apply for pre-approval to determine how much you can borrow and the terms associated with this mortgage. Pre-approval can give you a clear picture of your borrowing capacity and help you plan accordingly.
  5. Finalize the Mortgage: Upon pre-approval, work with your lender to finalize the terms of your readvanceable mortgage. Ensure you fully understand the repayment structure, interest rates, and any associated fees.

The Bottom Line

As Canadian homeowner you can leverage a unique blend of flexibility and financial security by using readvanceable mortgage. By combining a traditional mortgage with a home equity line of credit, you can leverage your home’s equity, that gives you access to manage debt, invest in opportunities, and cover unexpected expenses.

However, it’s essential to approach this financial product with discipline and a clear understanding of the terms to reduce any potential risk and use to achieve your desire goals and enhance your overall financial well-being.

Take the time to research your options, consult with a mortgage advisor, and carefully evaluate your financial situation. With the right approach, a readvanceable mortgage can be a valuable tool, that provides opportunities and resources you need to navigate life’s financial challenges.

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