What if you had access to additional funds at great mortgage rates that you could borrow at your leisure? Sound like a dream? Believe it or not it may just be your reality as the money you put into your mortgage every month can not only work to pay off your home but can also provide you with the ability to contribute to any investment you wish. Who would’ve thunk it? You can actually make the equity you have built in your home work for you now, rather than later. How? With a readvanceable mortgage.
A readvanceable mortgage has two components: (a) the mortgage portion, and (b) a line of credit. Each mortgage payment that you make builds your line of credit as you pay off your mortgage.
Each payment you make towards your mortgage consists of a (a) principal payment, and (b) an interest payment. With a readvanceable mortgage, each payment you make towards the principal can be borrowed back.
For example: Let’s say that your payments are $600/month, where $400 goes towards interest, and $200 goes to the principal. Each payment you make would result in $200 towards your credit line.
While this type of mortgage is perfect for finally completing home renovations and saving for possible emergencies such as job loss or health care expenses, you can also use it to build your investment portfolio.
When you pay off an investment loan, the interest you pay then becomes tax-deductible. This means that you can grow your investment portfolio at the same time as paying off your mortgage, a round-about way to make your mortgage tax deductible.
Investment Loan: A loan taken out for the purpose of investing.
You can pay down your line of credit with the help of your tax credits, making more room to borrow and continue investing at the same time as paying down debt. This is referred to as The Smith Manoeuvre.
Homeowners have been taking out lines of credits, separate from their mortgages, to pay off debts, invest and renovate for years. Many Canadians may not realize the flexibility and benefits a readvanceable mortgage can provide. As Elisseos Iriotakis from Safebridge Financial states,
“A readvanceable mortgage provides consumers with the opportunity to use the equity they have built in their homes to make financial investments they may not otherwise have had the opportunity to make. In addition, if you are using the line of credit to invest in a “qualifying investment”, you can also enjoy additional tax refunds. We advise our clients to apply the tax refund towards their mortgage so they become mortgage free sooner. This is a great strategy, but it isn’t for everyone, and a proper risk profile must be completed before proceeding.”
Switching to a readvanceable mortgage may make more sense than taking out a regular, non tax deductible line of credit or refinancing your home; however, as with any type of credit loan, there are some potential disadvantages: