What is a readvanceable mortgage?
Buying a home or refinancing your mortgage? Here’s what you need to know about readvanceable mortgages, one of the less-familiar (but oh-so powerful!) mortgage options.
Are you thinking of buying a home or refinancing your mortgage? If so, it’s important to understand all the options available to you. And while you’re likely familiar with traditional fixed-rate and variable-rate mortgages, don’t overlook the less familiar home borrowing options, such as readvanceable mortgages.
A readvanceable mortgage might be an unfamiliar type of home lending, but if you’re wondering how to borrow money from home equity, pay less to borrow, and potentially become debt-free sooner, now’s the time to learn how a readvanceable mortgage could help reduce your mortgage stress and borrowing costs.
What does “readvanceable” mean?
A readvanceable mortgage is similar to a mortgage line of credit, with a few important differences. Each readvanceable mortgage includes two components; a mortgage and a line of credit that you can pay down and borrow against. With each mortgage payment you make, some of your payment goes towards paying down the principal or amount borrowed, while the rest of your payment goes towards interest.
And with a readvanceable mortgage, each mortgage payment increases the amount you can borrow on your line of credit while paying down your mortgage.
So for a $800 mortgage payment with $300 going towards principal and $500 towards interest, the credit line portion of a readvanceable mortgage would increase by $300. In essence, you could access “readvances” on your mortgage and additional home equity with every payment you make.
Benefits of a readvanceable mortgage
Wondering how a readvanceable mortgage could help you? Here are a few benefits to consider.
Since the line of credit is secured against your home, you enjoy a lower interest rate than on an unsecured credit line.
Be prepared for unexpected events
With a bigger limit, you won’t need to request limit increases when unexpected events arise. So if you're hoping to renovate or update your home without going into debt down the road, a readvanceable mortgage means you won’t need to worry about a credit approval if your income changes in the future.
Quick access to your home equity
Readvanceable mortgages, like Manulife One, helped many people during the recent COVID crisis. If the homeowner had built up extra equity in their home with their readvanceable mortgage, they didn’t need to apply for mortgage deferrals.
It can help you invest
With a technique called the Smith Maneuver, you can use the credit line portion of your readvanceable mortgage for anything you want, including starting your own investment portfolio.
Make investment contributions directly from your credit line with each monthly credit line increase. Since Canadians can write off the interest paid on investment loans at tax time, you’ll enjoy a tax refund that can then get applied to your mortgage portion to help you pay off your mortgage even faster.
As this impacts your taxes, we highly recommend speaking with your advisor before investing with borrowed money.
Is a readvanceable mortgage right for me?
As flexible as this type of mortgage may be, it isn’t the right choice for everyone. If any of these sound like you, a readvanceable mortgage might not be the right fit.
You have less than 20% equity in your home
If your mortgage is more than 80% of the market value of your home, you have less than 20% equity. That means you won’t qualify from one of these mortgages until you’ve built up more equity. And if you’re planning to buy a home, you’d need at least 20% down to qualify for a readvanceable mortgage such as Manulife One.
You struggle to manage your cash flow and spending
If you find access to money or credit tempts you to spend more than you can afford, think twice before applying for a readvanceable mortgage. If you get one, you might find it “too easy” to spend money and to avoid paying down debt.
You anticipate your home's value decreasing
Since readvanceable mortgages give you access to up to 80% of your home’s value, if property values drop you could find yourself “under water” or owing more than your home is worth.
You prefer to keep your bank account and mortgage separate
Readvanceable mortgages such as Manulife One combine bank accounts, borrowing, short-term savings, and mortgages. Yet some people might prefer to keep these accounts separate for budgeting issues, or to keep savings or debt repayment separated between spouses.
You’re uncomfortable with anything other than a traditional mortgage
If the idea of readvanceable mortgages leaves you feeling anxious even after you’ve learned all about their pros and cons, you might want to hold off on getting one now. Stick with a traditional mortgage until your next renewal date then revisit the idea of a readvanceable mortgage.
How is it different from a HELOC?
Although readvanceable mortgages share some similarities with HELOCs, they’re different - but that doesn’t necessarily mean they are more complicated. For example, while Manulife One, our readvanceable mortgage, is a unique product, it is simpler than you might think.
Manulife One is what is known as an “all-in-one” mortgage - it is not a HELOC. A HELOC refers to the home equity line only, while an all-in-one mortgage is the overall mortgage that includes a credit line component.
If you’re not sure about getting a readvanceable mortgage, you might want to consider a HELOC, however keep in mind that not all HELOCs are the same. For example, some HELOCs include a feature that allows you to use the account as your everyday bank account by depositing your income to the account and making withdrawals as needed.
Talk to your advisor about your situation to see if a readvanceable mortgage or a HELOC is the right solution for you.
How to use an all-in-one mortgage
There are many different ways to use an all-in-one mortgage, depending on your mortgage setup, financial goals and situation.
With Manulife One, for example, you can combine your mortgage, bank accounts, short-term savings, and other debt. It is all in one account. This lets you consolidate a good portion of your finances, simplifying your record-keeping and cash flow.
Since your borrowing is secured against your home your debt is at a lower rate than typical credit card or car loan rates. And with daily interest calculations, deposits, like your pay cheques, get applied to your account and help you save interest and lower your borrowing costs immediately.
While traditional mortgages often make sense for many homeowners, they don’t always offer the flexibility you might need in the future. And in uncertain times, it’s important to have peace of mind when it comes to protecting your financial situation. Now could be the time to consider applying for a readvanceable mortgage so you could gain access to the equity in your home easily should the need arise.
How to qualify for a readvanceable mortgage
Qualifying for a readvanceable mortgage requires the same documentation and process as getting a traditional mortgage:
- Income and debt verification
- Complete list of your assets and liabilities
- A credit application and credit check
- Home appraisal
It’s also important to note that readvanceable mortgages usually require strong credit scores.