Readvanceable Mortgage

Access Your Equity Now With a Readvanceable Mortgage

What if you had access to additional funds at great mortgage rates that you could borrow at your leisure? Sound like a dream? Believe it or not it may just be your reality as the money you put into your mortgage every month can not only work to pay off your home but can also provide you with the ability to contribute to any investment you wish. Who would’ve thunk it? You can actually make the equity you have built in your home work for you now, rather than later. How? With a readvanceable mortgage.

What is a Readvanceable Mortgage?

A readvanceable mortgage has two components: (a) the mortgage portion, and (b) a line of credit. Each mortgage payment that you make builds your line of credit as you pay off your mortgage.

How does a Readvanceable Mortgage Work?

Each payment you make towards your mortgage consists of a (a) principal payment, and (b) an interest payment. With a readvanceable mortgage, each payment you make towards the principal can be borrowed back.

For example: Let’s say that your payments are $600/month, where $400 goes towards interest, and $200 goes to the principal. Each payment you make would result in $200 towards your credit line.

Using your Readvanceable Mortgage to build an Investment Portfolio

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, you can also use it to build your investment portfolio.

When you pay off an investment loan, the interest you pay then becomes tax deductible. This means that you can grow your investment portfolio at the same time as paying off your mortgage, a round-about way to make your mortgage tax deductible.

Investment Loan: A loan taken out for the purpose of investing.

You can pay down your line of credit 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.

Homeowners have been taking out lines of credits, separate from their mortgages, to pay off debts, invest and renovate for years. 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.”

Potential Disadvantages

Switching to a readvanceable mortgage may make more sense than taking out a regular, non tax deductible line of credit or refinancing your home; however, as with any type of credit loan, there are some potential disadvantages:

  • In order to qualify you need to have built up 20% of equity in your home.
  • 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.

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3 thoughts on “Readvanceable Mortgage

  1. From what I have seen, readvancable mortgages cost at least 1% more than regular mortgages. 1% of my principal = 3150. My interest expenses would be ~$10000. If my interest expenses are 100% due to a qualifying investment in a rental property, I could deduct 10000 from my rental property income, and thus I would pay about 2000 less tax.
    The $2000 savings won’t justify the $3150 extra interest charges, so the Smith Manoeuvre won’t help. Am I wrong?

    • Actually yes and no… my understanding of the smith manoeuvre is that your loan amount never changes. A fixed interest rate and constant loan amount will give you a solid starting point. If loan rates of mortgage types were equal your reinvested principle basically needs to come close to the cost of borrowing. If this is true and you apply your tax savings you are better in the long run. To compensate for a the higher mortgage interest rate you need to have a much higher investment return rate (since the higher mortgage rate applies to the entire borrowed amount).

      The Smith Manoeuvre is primarily a way to reduce the amount of taxes you pay. Since taxes vary with income the effectiveness of the Smith Manoeuvre is largely dependant on three key factors
      1) Borrowing Rate
      2) Investment Return
      3) Potential tax savings (If you pay low no taxes theres no point)

      • Not to mention that if you are doing the Smith Maneuver, then you are investing this credit. So not only is it a tax deduction method, but its like having monies in 2 places at once. That extra interest payment from 1% higher borrowing is nothing compared to the returns on principle going into the mortgage , into the LOC, and into someting getting you 8%. Sure it starts out slow. But as your payment goes from interest heavy to principle heavy velocity builds due to compunding.

        Many wealthy individuals do this same ting in the States only they have access to interest only mortgages and deduct the interest on the mortgage.

        This is also known as paying the mortgage off on a balance statement. Rather than locking the funds into brick and mortar not doing anything for you (or very little) get them out and put them dolalrs to better use, and stay liquid, and get tax deductions, and grow other assets, and, and, and.

        But hey, im not financial consultant, this is all my opinion of course :)

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