Few home financing products are as powerful as the readvanceable mortgage. Readvanceables give homeowners a source of low-cost cash—anytime they want it.
And it’s a source that grows. Essentially, readvanceables are mortgages linked to a line of credit. As you pay down your mortgage principal, you can re-borrow that principal off your line of credit.
In other words, your LOC credit limit increases over time.
As powerful as they are, most 5-year fixed readvanceables have an Achilles heel. They’re sold by lenders with awful prepayment penalties. In fact, that’s true for all top banks: RBC, TD, Scotiabank, BMO, CIBC and HSBC. There aren't many places to turn if you want a true readvanceable mortgage from a fair-penalty lender.
But there is one standout: Manulife Bank.
Manulife is a fair-penalty lender that just so happens to have one of the best readvanceables on the market, the Manulife One (M1).
In fact, the M1 is our choice for most borrowers needing a flexible readvanceable mortgage, and here’s why:
- Manulife doesn’t skewer you for breaking a mortgage early
- If you end an M1 with a fixed-rate mortgage portion before maturity, Manulife doesn’t rake you over the coals like the seven banks above. On an average-sized mortgage, that can save you thousands of dollars. Common reasons for breaking a mortgage include selling the home (and not rebuying right away) or refinancing before one’s maturity date.
- “We don’t do penalties based on a discount off posted rate,” says Jason Daly, VP of Product, Digital and Strategy for Manulife Bank. “We compare the client’s actual rate to our current [advertised] rate that is closest to the remaining term.” That's quite different from the big-bank method of using inflated posted rates and fictitious discounts from posted rates to calculate penalties.
- On a $300,000 balance, Manulife's method might amount to a $3,000+ cheaper penalty depending on rates at the time. That could be like getting an extra 0.25%-point discount off your interest rate if you do break early.
- At the very least, Manulife’s favourable penalty formula increases the odds you’ll pay just a three-month interest charge instead of a dreaded interest rate differential (IRD) penalty.
- It’s an “All-in-One”-style line of credit (LOC)
- This means you can do all your banking from it, including unlimited e-transfers and bill payments.
- The main benefit is interest savings, however. By keeping just enough of your borrowing in the LOC, you can offset it with income (like your paycheque). That cancels out the interest you would have owed on your LOC debt for the number of days it’s offset. Note: The interest cancellation benefit is most meaningful if you deposit a good chunk of money into the account each month. Offsetting just $5,000 of debt, for example, might only save you about $150 a year in interest.
- Quick Tip: It often pays to move just enough borrowing into the LOC portion so that it is offset by your expected deposits in the coming month. To move debt from your Manulife mortgage portion to your LOC portion, simply borrow from the HELOC to make a prepayment on the mortgage. Manulife lets you do this multiple times a year so long as you don't prepay more than 20% of the original mortgage amount in any one year.
- Readvancing is automatic
- Some lenders make you wait weeks to re-borrow the principal that you paid down on your mortgage portion. Or they make you submit an abbreviated application to increase your LOC limit. Not Manulife. As soon as a principal payment is recorded on the mortgage, you can reborrow those funds immediately from the LOC. That’s key if you’re using the M1 for leveraged investing strategies like the Smith Manoeuvre.
- It’s fully portable
- Unlike some banks’ readvanceables, both the amortizing portion(s) and the line of credit portions are completely portable. Once your existing home sells, Manulife gives you 90 days to port the entire M1 to a new property and avoid prepayment charges on any fixed-rate portions.
- Note: If you just have a line of credit and no fixed portions, there is no penalty. Like virtually all LOCs, the M1 LOC is fully open.
- It can go behind another lender’s mortgage
- Want a HELOC but have an existing mortgage and don’t want to break it? Manulife lets you add an M1 on top of that mortgage (in “second position”) with no setup fees. You need to be referred by a Financial Advisor directly to apply for this version (brokers only sell M1s in first position).
- Quick Tip: You get Manulife's best rates when you do this, but if you don't refinance it into first position at renewal (i.e., replace your current mortgage with a Manulife mortgage), the LOC rate goes up 100 bps. That's the policy as of the date of this article, anyhow. So if you don't plan on moving everything to Manulife eventually, then you might want to look at a HELOC lender without this rule, like Simplii. That's a consideration, for example, if you want to keep the HELOC behind a discounted variable-rate mortgage, given Manulife doesn't offer a discounted variable-rate portion with its M1.
- You can lock in LOC borrowing to fixed-rate terms as short as 12 months
- That can save you interest if:
- (A) you know you won’t pay back the debt for many months, and
- (B) you negotiate a good one-year rate with Manulife.
- Manulife allows up to five such “term” mortgage portions, plus 15 LOC-tracking accounts (in case you want to segment your LOC borrowing to track interest separately; which is handy if you’re writing off the interest for investment purposes.)
- That can save you interest if:
- Locking in portions of the LOC is also useful if fixed rates drop materially. If you have a 2.99% 5-year fixed portion, for example, you can use the LOC temporarily to prepay it, then turn around and convert that LOC debt into an even lower (e.g., 2.49%) fixed rate.
- It’s a cheaper reverse mortgage alternative
- “The Manulife One makes great sense as a reverse equity strategy to access equity in the home,” says Daly. While most reverse mortgages are in the 3.99%+ range, an M1 starts at prime + 0.60%.
- The bank encourages clients to set up an M1 before retirement when their income is higher and it’s easier to qualify. That’s key for some seniors because, “It can be difficult [to qualify] post-retirement when you've got just pension or investment income,” Daly explains.
- Other nuggets of note:
- If you need more money — say you buy a more expensive home—you can port and increase the M1 with no penalty.
- Increasing the authorized total borrowing limit entails no legal fees — so long as you increase it to no more than 100% of the original property value. The only cost out of your pocket is for an appraisal.
- Manulife offers cheaper rates if your mortgage meets “insurable” criteria (i.e., the mortgage is for a purchase or you're switching to Manulife with no changes to your mortgage portions, the property is owner-occupied, the home value is less than $1 million and the amortization is 25 years or less.)
- Unlike some readvanceables, the M1 is available on non-owner occupied properties too. (A slight rate premium applies for investment property M1s.)
- It’s easy to link the M1 to external accounts. You can do it in 24 hours through an online request. This linkage permits fast online fund transfers (another essential feature for leveraged investors like Smith Manoeuvre users). These transfers to third-party institutions can be done in as little as one to two days — with no fees.
As good as the M1 is, there are things we're not crazy about. For instance:
- The advertised LOC rate (i.e., Manulife One Base Rate which is prime + 0.60% currently) is higher than most banks, which offer prime + 0.50% or less. We encourage readers to try and negotiate this rate down if they’re well-qualified, but further discounts are on an exception basis only and rare, says the bank.
- Manulife's one-year fixed rates are on the high end of the range for a bank. Lower one-year fixed rates would make the M1 far more useful for people who want to periodically lock in LOC borrowing.
- The fee is $16.95 a month. You’d think a bank making thousands of dollars in mortgage interest wouldn’t need to hit you with such fees. But that's the price it exacts for the flexibility you get, including the M1's interest offsetting feature. (Note: The fees are discounted to $9.95 if you’re a senior citizen and waived if you get a new Manulife VISA. Conditions apply.)
- You can’t get a deep-discount variable-rate portion. As of today, banks like RBC, Scotiabank and National Bank let you add a regular amortizing variable portion to their HELOCs at rates like prime - 0.50% — over a point lower than Manulife's LOC rate. That and Manulife's subpar short-term fixed rates make this product best suited for people who want a 5-year fixed readvanceable (the majority of the population).
The COVID Experience
The M1 proved its value to thousands of borrowers during the COVID crisis in spring 2020. “Our number of inquiries for financial relief was a fraction of the numbers of the big banks,” Daly says. That’s because M1 users were able to live off their M1 line of credit while being temporarily out of work.
If unexpected income loss occurs, having an M1 “avoids figuring out how to defer mortgage payments,” he adds. And Daly says it is not bank policy to call in M1s, so long as the borrower is not in default and is making all required payments.
To date, the bank says its M1 loan losses have been “well below industry averages” during the pandemic. Clearly, flexibility keeps people afloat.