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(July 26, 2021)

Intro (pre-amble): up to 17:48 mark of podcast

If you’re about to secure a mortgage, here’s something you might want to consider regardless of whether it’s a purchase, refinance or renewal. Make the mortgage readvanceable.

What does readvanceable mean?

Firstly, a readvanceable mortgage starts out as a typical mortgage where a specific portion of your payment goes towards the interest charge and the rest gets directly applied towards the mortgage principle gradually paying it down over time, thereby, building equity in your home. But this is where the similarities stop and the readvanceable mortgage begins to impose its leading characteristics.

Firstly, readvanceable mortgages include at least two components; a regular principal-interest mortgage and a Home Equity Line of Credit. The supplementary Home Equity Line of Credit acts as the primary component that allows the mortgage to become readvanceable. A mortgage becomes readvanceable when the first mortgage payment is made and it continues on until the mortgage is eventually paid off. But here’s where it gets really interesting. As the mortgage principal is getting paid down (with every mortgage payment), the corresponding Home Equity Line of Credit limit increases proportionately by the precise amount of the principal pay down.

So let’s say you have a $500,000 mortgage with a monthly payment of $2,175 with $1,275 going towards principal and $900 towards interest. In a readvanceable mortgage, the $1,275 allocated towards the principal would instantly increase the Home Equity Line of Credit portion by the same precise amount. Furthermore, you can also access/withdraw the proceeds within days of your most recent mortgage payment, hence the term, readvanceable.

So after 5 years, the total principal pay down on the fixed portion of the mortgage would be $79,047. This figure would also directly translate to an increased Home Equity Line of Credit (HELOC) for precisely the same amount. And lastly, payments are only payable on the balance owing…unused funds will remain fully accessible into the future for as long as you own the home. Interest is typically calculated and determined based on a small premium on Prime Rate (currently 2.45%). As of today, the best Mortgage Line of Credit is at Prime + 0.50%. For every $100,000 of borrowed HELOC proceeds, $245.83 is charged on a monthly basis. In addition to making the interest only payment on HELOC proceeds, one could also arrange to increase the monthly payment as aggressively as they desire.

BENEFITS of a READVANCEABLE MORTGAGE:

flexibility in payments (interest only payments, principal-interest payments, or combination of both)
excellent interest rates and flexibility to allocate particular mortgage amounts to specific mortgage terms and amortizations
divide your HELOC proceeds into as many as 14 unique sub-accounts and receive dedicated statements for each account (this is especially valuable when using HELOC proceeds for investment purposes as you can source and verify the precise tax deductible interest charges…your accountant will appreciate this!)
excellent way to build an emergency supply of funds
no need to ever re-apply for a refinance as home equity is automatically converted to a fully accessible HELOC. This also eliminates legal fees associated with refinancing a mortgage
funds can quickly and conveniently be diverted to purchasing units in a mutual fund, thereby creating a tax deduction on the monthly interest payment (consult with your accountant and financial planner on investments and tax deductions)

DISADVANTAGES of a READVANCEABLE MORTGAGE:

if you have less than 20% equity in your home, you are not eligible for a readvanceable mortgage (the precise equity is determined based on a lender-selected appraisal)
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 avoid paying down debt

SUMMARY:

Readvanceable mortgages are excellent mortgage products for various reasons and are especially popular amongst self employed applicants as they often value the ability to have access to large amounts of cash at preferred terms. Readvanceable mortgages are also (somewhat) safeguarded against applicants who may tend to run up the balance unnecessarily as the barrier to qualify for them is quite high (above average credit scores are required to qualify for readvanceable mortgages). Refinances are limited to 80% of the appraised value of your home, but readvanceable mortgages are capped at 65% (the remaining 15% of refinance proceeds cannot be readvanceable).