Most people would love to pay down their mortgage quicker if they could.
Making pre-payments generates one of the best returns on your money, for two reasons:
There’s no risk
You’re guaranteed a return without losing your principal.
Taxes are due on interest you earn, not on interest you save
As a result, the effective after-tax rate of return on a mortgage pre-payment is pretty decent.
Example: Pre-paying a 3.99% mortgage in a 40% tax bracket is like earning 6.65%, risk-free.
Yet, many people won’t use their spare cash to pre-pay their mortgage, for fear they might need that money down the road.
That’s supported by a recent Manulife Bank survey that suggests nearly half of Canadians would consider pre-paying their mortgage if they could “easily access that money again, should their needs change.”
One way to do that, of course, is with a readvanceable mortgage. A readvanceable lets you re-borrow paid-down principal any time you need it, up to your approved limit.
In a readvanceable, your “limit” is the total borrowing your lender approves you for, including both your mortgage and line of credit.
Readvanceables are available to well-qualified borrowers who have at least 20% equity in their home. If you can get a readvanceable for a similar rate as a regular mortgage, it’s worth considering. Having the benefit of liquidity can be priceless if a need arises later for low-cost funds.
Just remember two things if you’re considering a readvanceable:
Readvanceable mortgages make it easy to spend, so be sure you’re disciplined enough not to blow the line of credit on discretionary spending.
If you move a readvanceable mortgage to a new lender at maturity the mortgage must be re-registered. That means you’ll often need to pay a lawyer—whereas a regular mortgage can be switched without legal fees.