Why You Should Consider Getting One

These days it seems as though the housing market has been cooling down, so it doesn’t come as a surprise that many Canadians are moving forward with their house-buying plans.

With so many mortgage options, it can be difficult to choose one that’s best for you. Be that as it may, readvanceable mortgages are definitely an option to explore, especially in today’s economic climate.

They are a lesser-known option but worth considering if you’re looking to buy a home or even refinance your mortgage.

Readvanceable Mortgages Explained

For starters, a readvanceable mortgage is comprised of a line of credit which allows for borrowing and a mortgage. Essentially, this type of mortgage combines a home equity line of credit, also known as HELOC, with a traditional mortgage.

Personal finance writer Julia Kagan explains that readvanceable mortgages allow the borrower to “add a line of credit to the loan, permitting the borrower to re-borrow any part of the principal paid down.”

Read More: How To Deal With Mortgage Payment Difficulties

So as you make payments towards your mortgage, the amount of credit available to you increases. Although readvanceable mortgages encompass a home equity line of credit, there are still some key differences that make this type of mortgage unique.

How Is A Readvancable Mortgage Different Than A HELOC?

Both HELOCs and readvanceable mortgages have similar features but there are a couple of things setting them apart.

A HELOC is a type of credit that enables access to large reserves to be used for debt repayments or for purchases with a higher price tag. Many opt for HELOCs due to the competitive variable rates at which they are offered. With this line of credit, your home’s equity is taken as collateral, explaining the access to a large pot of funds.

Read More: New Rules For Reverse Mortgages and HELOCS by OSFI

A readvanceable mortgage works differently by the borrower accruing access to more funds with each principal payment made on the mortgage.

This is the one of the main differences instead of having access to reserves immediately like a HELOC. Similar although different, HELOCs and readvanceable mortgages are both options to consider given rising interest rates. However, readvanceable mortgages might be a more suitable option if interest rates continue to climb.

Using A Readvancable Mortgage For The Smith Manoeuvre

Borrowers can make their readvanceable mortgage interest payments tax-deductible using the Smith Manoeuvre.

Back in 2002, financial planner Fraser Smith created a debt conversion strategy known as the Smith Manoeuvre. By having a readvanceable mortgage and using the Smith Manoeuvre, borrowers will potentially be able to profit and reap the benefits of tax-deductibles.

Read More: Save Money On Your Taxes Using The Smith Manoeuvre

The Smith Manoeuvre involves taking the line of credit within a mortgage and turning it into an investment loan. By using a readvanceable mortgage with the Smith Manoeuvre you could increase your tax return.  Then you can be apply it onto your mortgage, effectively reducing your debt.

Julia Kagan says that the “borrower entering a readvanceable mortgage will usually need to be an engaged and attentive investor in order to make smart investments with the reborrowed funds and mitigate the impact of the higher interest rates on the line of credit.”

The Smith Manoeuvre strategy isn’t something that everyone knows about. But it’s definitely a strategy that can save you money and even make some. However, it is always important to consult your financial advisor when deciding to take on a new investment practice.