Re-advanceable Mortgages = Financial Flexibility

A re-advanceable mortgage, also known as a re-advanceable or home equity line of credit (HELOC) mortgage, combines a traditional mortgage with a revolving line of credit. It is the "Swiss Army Knife" of mortgages!

There are at least two parts to this special mortgage product:

1. a "mortgage" portion, and a
2. a line of credit (LOC) portion, similar to a Home Equity Line of Credit (HELOC) but much better...

We like to call this product a RELOC, and it is an amazing tool in the right hands. It offers many features that can be extremely beneficial for financially-responsible borrowers. Here are our top RELOC features:

1. Revolving Credit Facility

A key feature of a re-advanceable mortgage is the ability to access a revolving line of credit based on the equity in your home. As you make your regular mortgage payments, the portion made to principal increases (or re-advances to) the credit line limit, allowing you to borrow again up to a pre-approved limit without having to reapply. 

For example, if your mortgage balance decreases this month by $1000, your LOC limit will increase by the same $1000. As the sum of your mortgage balance and LOC limit is constant (often referred to as the Global Limit), the more regular mortgage and lump-sum payments that you make, the more your credit line limit grows! 

2. Flexibility in Borrowing

HELOC rates in Canada are based on the Prime Lending Rate, and change when Prime does, which is set by the Bank of Canada. Borrowers can withdraw and repay funds as needed, providing flexibility to manage cash flow, finance renovations, consolidate debt, or cover emergency expenses.  The interest is only charged on the amount withdrawn, similar to a credit card.

The video will help illustrate the dynamic interaction on how the line of credit interacts with your mortgage balance:

3. Potential for Lower Interest Rates

The interest rates on the revolving credit or HELOC portion of a re-advanceable mortgage are typically 2-3% lower than those on unsecured lines of credit or credit cards, as the debt is secured against the value of the home., and with certain RELOC lenders the line of credit balance can be converted to an amortizing fixed-rate loan with its own monthly payment if you don't plan to pay it back soon.

4. Simplified Management

Combining the mortgage and line of credit into one account can simplify financial management. You only need to manage one account, making it easier to keep track of your debt and payments.

5. Interest-Only Payment Options

For the line of credit portion, borrowers often have the option to make interest-only payments, which can reduce monthly outgoings. This flexibility can be especially useful during periods of financial strain. Indeed, you could use the revolving credit line to make all your payments including your mortgage payment in an emergency, and during COVID-19 this was a godsend for those who had a RELOC.

6. Accelerated Mortgage Payoff

Most mortgages offer incremental repayment options, and RELOCs are no different. Knowing that your home equity is always available, borrowers can confidently direct extra funds toward the principal owing without the need to set aside reserve funds for emergencies. This allows and - I'd say - encourages borrowers to pay off their mortgage much faster, which can reduce their life-time mortgage interest costs.

7. Credit Access Without Requalification

Once the RELOC is set up, you don’t need to requalify for additional borrowing, providing continuous access to funds as needed, which can be a significant advantage over traditional loans. This 'credit access without requalification' feature can be hugely beneficial to borrowers about to leave regular employment (for example, to become self-employed or to retire), who's borrowing options become limited when their regular incomes dry up.

8. Debt Consolidation

A re-advanceable mortgage can be used to consolidate high-interest debts into a lower-interest home equity line of credit. This can simplify payments and reduce the overall interest burden. 

9. Equity Growth Utilization

As the property value increases over time, the available credit limit on the line of credit can also increase (upon re-qualification), allowing borrowers to tap into the growing equity of their home. While re-qualification is required, borrowers do have the option to easily increase their equity access often with just an appraisal and a few income tax documents.

10. Investment Opportunities

Some borrowers use the line of credit for investment purposes, leveraging their home’s equity to invest in other assets, potentially creating additional income streams or capital gains. In Canada, the interest paid on the line of credit portion of a re-advanceable mortgage may be tax-deductible if the borrowed funds are used for investment purposes, providing a potential tax benefit. This tactic is part of what is called the Smith Manoeuvre. 

Conclusion

A re-advanceable mortgage / HELOC (or RELOC as we call it) offers significant flexibility and benefits for homeowners who manage them wisely. They provide a combination of stable mortgage payments with the flexibility of a line of credit, making them an attractive option for those looking to leverage their home’s equity for various financial needs. However, they also require disciplined financial management to avoid over-borrowing and potential financial difficulties.

How to Apply?

This mortgage / HELOC product is best-suited for borrowers with the following characteristics:

• You own your own home or other residential property (or are about to purchase one)
• Your current mortgage balance-owing is 80% or less of your current property value (or you have 20% down payment or more if buying)
• You are disciplined with your finances.
• You are interested in ways that you can leverage or access the equity that you have built up (or will build up) in your home to meet other financial objectives
• You are currently employed and have a good credit rating
• You have new or replacement mortgage requirement coming up