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Pre-paying A Readvanceable Mortgage

Money in the bankMost 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:

  1. There’s no risk
    • You’re guaranteed a return without losing your principal.
  2. 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.


manulife-bank Sidebar:  The Manulife Bank survey had a few more notable findings:

  • 64% of respondents did not make any mortgage pre-payments in the past year
  • 43% said they’d have difficulty making their regular mortgage payment within three months, if the primary income earner lost their job. Of these, 17 per cent would have difficulty after one month.
  • 40% could keep up their mortgage payments for 3-12 months if the primary income earner lost their job.