Re-advanceable Mortgages Equal Financial Flexibility

A re-advanceable mortgage, also known as a re-advanceable home equity line of credit (HELOC) mortgage, combines a traditional mortgage with a revolving line of credit.

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, a Re-advanceable Equity Line of Credit. It is an amazing tool in the right hands. It offers many features that can be extremely beneficial for financially-responsible borrowers. It is - in our view - the  + Swiss Army Knife +  of mortgages!

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!

Note: the key difference between a regular HELOC and a RELOC is that a HELOC limit is static (never changes), whereas the RELOC limit increases every time you make a mortgage payment.

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  The interest is only charged on the amount withdrawn, similar to a credit card.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 typically range 2-3% lower than those on unsecured lines of credit (and significantly lower than credit card rates), as the debt is secured against the home's value. Additionally, certain RELOC lenders offer the option to convert the line of credit balance into a secondary amortizing mortgage segment with it's own fixed rate and monthly payment, providing flexibility for those not planning to repay it quickly.

4. Simplified Management

Consolidating the mortgage and line of credit into a single account can streamline financial management. With just one account to oversee, tracking your debt and payments becomes more straightforward. Segmented reporting options can also prove highly advantageous for tax purposes.

5. Interest-Only Payment Options

For the line of credit portion, borrowers often have the option to make interest-only payments, which can provide relief on monthly expenses. This flexibility can be particularly helpful during challenging financial times. In fact, the revolving credit line could be a lifesaver, allowing you to cover all your payments, including your mortgage, in times of crisis like the COVID-19 pandemic, especially for those with a RELOC where mortgage payments made further increase the line of credit limit.

6. Accelerated Mortgage Payoff

Most mortgages offer the ability to make extra payments to the principal balance without penalty, and RELOCs follow suit. Knowing that access to your home equity is readily available, borrowers can confidently allocate extra funds towards reducing the principal balance without the need to set aside emergency reserves. This not only allows but can also motivate borrowers to pay off their mortgage more quickly, ultimately lowering their lifetime 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 cost. 

9. Equity Growth Utilization

As the property value increases over time, the RELOC's global credit limit can also be increased, allowing borrowers to further tap into the growing equity of their home. While re-qualification is required, the process can be as simple as a new appraisal and a few employment / income tax documents. For example, borrowers nearing retirement may wish to maximize their RELOC limits while they can still qualify. 

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 can 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 need a new or replacement mortgage soon!

How to Use Your Re-advanceable Mortgage / HELOC

Re-advanceable mortgages are great for people who might need a growing source of funds. Follow the links for for detailed discussion and illustrations on how it might apply in your situation.

• Home improvements
• Garden or rental suite
• Acquire and/or develop vacant land
• Down payment for a rental property
• Down payment to help kids purchase their first home
• Buy a property in a foreign country: For example, tapping into your existing home equity in Canada can give you the required funds to purchase a vacation condo in Costa Rica.
• Cottage or vacation property
• Unexpected emergencies or job loss
• Rainy-day fund substitution
• Investments
• The Smith Maneuver 
• Business expenses 
• Health care expenses
• Education costs
• Retirement - access to funds instead of a Reverse Mortgage