Readvanceable mortgages are a clever product for many people. However, most don’t actually know what they are or that they even exist.
A readvanceable mortgage is a product that combines a Home Equity Line of Credit (HELOC) with a standard mortgage. Basically, as you pay down the principal of the mortgage, the limit of the credit line increases allowing you to borrow against it at any point without incurring any transactional cost.
The benefit to a borrower is that you can pay down the principal as aggressively as you’d like (within the prescribed limitations), but still access that money at a later date if required. This is useful for renovations, investments, emergencies, etc., and you don’t pay interest on the money unless you use it. Moreover, when you pay it back, you stop paying interest. Keep in mind that once you pay down the principal of a standard mortgage, you can’t access that money without refinancing the mortgage, which would trigger a penalty or a blend, appraisal fees, legal fees and wasted time. Readvanceable mortgages are inherently flexible and will often save money and time in the long term.
Does it sound too good to be true? Perhaps, but it’s not. The problem, however, is that to qualify for such a product you need to have at least 20% down payment/equity in the property. If this condition can’t be met, then the product is unavailable. The other potential limitation is that you may pay more (in terms of rate) for a superior product. While this makes logical sense, some borrowers may be blinded by rate – and when we talk about higher rates, we’re talking about a whopping 5-10 basis points! For those of you who are unaware of what a basis point is, it’s equivalent to 1/100th of a percent. When you do the math, you’ll quickly realize how trivial this difference is (most of you, that is).
Assume the property is valued at 500K. The maximum global lending limit is 80% of that amount, so 400K. Let’s suppose you only need to borrow 200K. You can take the 200K as a standard mortgage with a variable or fixed term and register the other 200K as an un-drawn HELOC. As you pay down the principal of the mortgage, your HELOC limit will increase accordingly. Now, let’s assume you need a 400K mortgage. You can register the HELOC as 0 and as you pay down the principal, the HELOC limit will still increase and be available to you as required.
All in all, it’s a phenomenal product and should definitely be considered if you’re in a position to choose it.