Now that the kids are back in school and the holidays are around the corner, it may be a good time to tackle those projects you were putting off all summer; projects you may have been putting off because your current income hasn’t allowed you to proceed.

What if you had access to additional funds at great mortgage rates that you could borrow at your leisure? Believe it or not, the money you put into your mortgage every month can not only work to pay off your home but can provide you with the ability to contribute to any investment you wish. You can actually make the equity you have built in your home work for you now, rather than later.

How? With a readvanceable mortgage.

A readvanceable mortgage works like this: as you pay down your principal, your home equity line of credit HELOC increases, providing you with additional funds whenever you need it. In other words, as soon as you make a mortgage payment you can then borrow the principal you have paid off back from the lender. What better way to take advantage of the equity you have built up in your home? And with the current low mortgage rates available, now may be a better time than any to take advantage of this type of loan.

While this type of mortgage is perfect for finally completing home renovations and saving for possible emergencies such as job loss or health care expenses, it may also be a good idea to use it to build your investment portfolio. If you use your equity to pay off an investment loan, the interest is then tax deductable, where a mortgage isn’t. You grow your investment portfolio at the same time as paying off your mortgage, essentially making your mortgage tax deductible. Your line of credit can be paid down with the help of your tax credits, making more room to borrow and continue investing at the same time as paying down debt. This is referred to as The Smith Manoeuvre. While it sounds like a great plan, this revolving strategy can be confusing and involves some risk. Therefore it is important to speak with a financial planner before going ahead.

Home owners have been taking out lines of credits, separate from their mortgages, to pay off debts, invest and renovate for many years. But as many of us are juggling paying off our homes with investing for the future, many Canadians may not realize the flexibility and benefits a readvanceable mortgage can provide. As Elisseos Iriotakis from Safebridge Financial states, “A readvanceable mortgage provides consumers with the opportunity to use the equity they have built in their homes to make financial investments they may not otherwise have had the opportunity to make. In addition, if you are using the line of credit to invest in a “qualifying investment”, you can also enjoy additional tax refunds. We advise our clients to apply the tax refund towards their mortgage so they become mortgage free sooner. This is a great strategy, but it isn’t for everyone, and a proper risk profile must be completed before proceeding.”

So, is a readvanceable mortgage right for you?

Well let’s first explain the difference between this type of mortgage and a standard traditional mortgage. Traditional home financing can build up equity but it is only when you pay the loan off or downsize that you can benefit from the equity built. With a readvanceable mortgage, you gain access to that equity built up in your home as you are building it (up to 80% of the home’s current appraised value). And because it is a line of credit, you only pay back what you have used.

Here are some more advantages of a readvanceable mortgage:

• This type of mortgage loan is ever revolving. You have the ability to continually borrow and re-borrow up to your available limit without having to pay new loan costs. So when you pay the money back, you still have the option to use your loan again.
• Interest on investment loans will generate a tax deduction. Therefore debt accrued will be good debt rather than bad debt and you can use your tax deduction to further help pay off your mortgage.
• You can more quickly pay down other, non tax deductable debt with the tax deductions you accumulate.

Of course, switching to a readvanceable mortgage may make more sense than taking out a regular, non tax deductable line of credit or refinancing your home; however, as with any type of credit loan, it is important to explore the possible disadvantages associated with it, including:

• In order to qualify you must have built up 20% of equity.
• Interest rates are not guaranteed for the life of the loan term.
• Your credit score needs to be high (close to 700). You could risk gaining a tarnished credit score if you do not keep up with repayments. Therefore, it is important to treat this loan as you would a credit card.
• You have to be confident that your property value will appreciate in order to benefit from the equity you build in your home.

Switching from a traditional mortgage to one of the readvanceable mortgage products on the market today can have quite a powerful effect, not only on your future financial portfolio, but also with unexpected emergencies, and home upgrades. Each lender will provide different readvanceable mortgage products (i.e. Scotiabank offers STEP, BMO offers Readiline, etc.) so it is important to speak with your mortgage broker and/or lender to learn about monthly fees, maximum loan amounts and interest options before making the decision to switch over.

Caroline
PR@RateSupermarket.ca

Related posts:

1. Home Equity Loans Explained
2. Mortgage Refinancing in Canada
3. Benefits of Using a Canadian Mortgage Broker
4. Canadian Reverse Mortgages – Financing Dream or Nightmare?
5. New to Canada Mortgage Program

Tags: HELOC, home equity, mortgage rate, readvanceable mortgage