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Mortgage comes in different colours, flavours, and tastes. Lenders have long used combinations of these attributes to customize mortgages to suit the market’s needs. You want a mortgage that best meets your homeownership, family, and financial needs as a borrower.
You want to fully utilize all the benefits and perks of your mortgage, which this guide will help you achieve.
Let’s look at readvanceable mortgage, their benefits, drawbacks, and a few readvanceable mortgages in Canada.
A readvanceable mortgage is a two-in-one type of mortgage – a standard mortgage and a line of credit, combined and offered as one mortgage product.
This mortgage’s line of credit portion is structured to mimic standard or standalone Home Equity Line Of Credit (HELOC) characteristics. You can re-borrow from the HELOC as you pay it down. But you are not allowed to re-borrow from the standard mortgage portion of the loan.
A readvanceable mortgage is a great way to secure consistent access to your home’s equity in cash.
A typical mortgage’s regular payment structure comprises a principal payment and an interest payment. The principal portion of the payment goes to pay down the mortgage, and the interest portion pays off the interest expense of the mortgage.
In a readvanceable mortgage, the principal payment that goes to pay down the mortgage automatically becomes available for you to access as a Line of Credit.
In a nutshell, you build up the HELOC portion of the mortgage as you pay down the principal portion of the standard mortgage.
So if you are required to make a regular mortgage payment of $1,500 every month, of which $800 goes to pay down the mortgage and $700 goes to pay off the interest portion. The $800 will instantly be available for you to withdraw. Your HELOC available credit will increase by $800.
You do not have to apply or get qualified to access this money. That’s the beauty of a readvanceable mortgage.
This shift will continue until the HELOC portion makes up 65% of the property value.
Unlike with a standard mortgage, where you will need to refinance the mortgage to access the money you have paid, you can instantly access the money you paid for the mortgage loan with readvanceable mortgage products without submitting a new application.
Readvanceable mortgage products allow you to access money without necessarily breaking your mortgage by ending the term early. With a readvanceable mortgage, you can access money by drawing down from the HELOC portion of the mortgage.
You will have to refinance your mortgage or get a second mortgage without the readvanceable feature. Mortgage penalties can be pretty stiff.
In addition to the possibility of a penalty, if you try to cash out on the equity of your property early, there are also standard mortgage closing fees you will incur like a lawyer fee, origination fee, and an appraisal fee with a standard mortgage program.
It is easy to manage the payment of a readvanceable mortgage. Even though the mortgage is paid up in two parts, you only make one mortgage payment. Behind the scenes, this mortgage payment is split, and the principal portion of your payment goes to increase your HELOC available credit, which you can withdraw instantly.
Readvanceable mortgages can also motivate you to pay your mortgage without fear of being short of cash at some future point. Since you can access the cash in your equity as needed, you will likely be motivated to pay more for your mortgage.
Paying more toward your mortgage helps you reduce the amount spent on interest payments. However, you should be careful not to pay over your prepayment privilege limit. Otherwise, you will be charged a penalty.
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You need a 20% equity to qualify for a readvanceable mortgage. The high equity requirement makes it hard for someone with a low down payment, especially first-time homebuyers, to be eligible for readvanceable mortgage loans.
If not careful, you may find yourself owing more than you own. You must only make the interest for the HELOC portion of the mortgage. That may not incentivize you to pay down the principal of your mortgage loan.
You may have a high loan balance at the end of your term, which may impact your ability to renew your term or refinance the mortgage, especially in a declining house environment.
The ease of accessing credit with a readvanceable mortgage may fuel overspending habits for some borrowers. The HELOC is a loan that has to be paid back, but the availability of the money may cause you to use the HELOC like a chequing account – as you pay down your mortgage, you start swiping the card.
Overextending your spending habit can lead to bankruptcy, foreclosure, or severe debt issues.
Your mortgage loan-to-property value ratio or Loan-to-value (LTV) ratio needs at most 80% to be eligible for a readvanceable mortgage. That means enjoying the flexible benefits of a readvanceable mortgage.
You must put down at least 20% of the purchase price from your resources when buying a house. Or you have accumulated enough equity in your property to be eligible for a readvanceable loan when refinancing.
You can end up owing more in mortgage than the value of your property in a declining property value environment. Because you have access to withdraw up to 80% of your house value, you may end up in an out-of-equity situation if the market value of your house falls below 80% of its original value.
A readvanceable mortgage may not be the right option if you have poor cash management habits. If you are not good at making wise spending decisions or are an impulse buyer, you must rethink before signing up for a readvanceable mortgage. You might end up in a winding trap with no progress in paying down your mortgage because you consume as you pay it down.
If you plan to pay off your mortgage quickly, then a readvanceable mortgage may not be the right option. Redrawing from your mortgage does not help to reduce the mortgage balance. You may never be able to pay off your mortgage if you have to withdraw the amount you paid.