Loading the player...

DEFINITION of 'Readvanceable Mortgage'

A mortgage feature that allows the borrower to re-borrow the principal amount of the original mortgage that has been paid down. A readvanceable mortgage consists of a mortgage and a Line of Credit (LoC) packaged together. With every monthly mortgage payment made by the borrower, the mortgage principal is reduced by a certain amount; the funds available to the borrower under the LoC go up by the same amount and are generally re-borrowed automatically. While the borrower’s net debt remains the same, the interest payments on the LoC are tax-deductible in Canada if the borrowed amount is used for investment purposes. The readvanceable mortgage forms part of a tax strategy called the “Smith Maneuver” that is designed to make interest payments on Canadian home mortgages tax-deductible.

BREAKING DOWN 'Readvanceable Mortgage'

For example, assume a homeowner takes out a readvanceable mortgage for $250,000, with an amortization period of 25 years and a mortgage interest rate of 5%. The monthly mortgage payments are approximately $1,460, of which part constitutes mortgage principal repayment and the balance mortgage interest. If the first mortgage payment of $1,460 comprises $460 in principal repayment and $1,000 in interest, then the amount that can be re-borrowed by the homeowner under the LoC is $460. At the end of the first year, if the mortgage principal that has been repaid totals $6,000, the amount available to the homeowner under the LoC is $6,000.

The rationale for taking out a readvanceable mortgage is that the funds available in the LoC should be deployed immediately in investments. This would make interest payments on the LoC tax-deductible, unlike interest payments on mortgages that are not tax-deductible in Canada. This tax-deductibility of LoC interest may result in a tax refund when filing a Canadian tax return. This refund can be used to pay down the mortgage principal, thus accelerating its repayment.

A readvanceable mortgage has some drawbacks. First, the homeowner’s net debt remains the same after many years, rather than being paid down as it would be with a conventional mortgage. Second, use of this strategy requires investment acumen and strict fiscal discipline. The homeowner has to invest the re-borrowed amounts judiciously and not fritter it away on frivolous purchases. Third, the LoC interest rate is typically significantly higher than the interest rate on the mortgage component.

RELATED TERMS
  1. The Smith Maneuver

    A strategy that makes interest on a residential mortgage tax-deductible ...
  2. Second Mortgage

    A type of subordinate mortgage made while an original mortgage ...
  3. Mortgage Accelerator

    A type of mortgage loan program popular in the United Kingdom ...
  4. CMG Plan

    A mortgage plan in which a borrower's mortgage is structured ...
  5. Primary Mortgage Market

    The market where borrowers and mortgage originators come together ...
  6. Mortgage

    A debt instrument, secured by the collateral of specified real ...
Related Articles
  1. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  2. Personal Finance

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2016 can all be done online.
  3. Personal Finance

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2016 can all be done online.
  4. Personal Finance

    Be Mortgage-Free Faster

    Getting rid of this debt faster has bigger benefits than you might think.
  5. Taxes

    Creating a Tax-Deductible Canadian Mortgage

    Find out how to get a tax benefit from your mortgage like your neighbours to the south.
  6. Financial Advisor

    Reverse Mortgages: Right for Clients? Not Often

    Reverse mortgages are a legitimate vehicle for folks age 62 and up to tap into the equity in their homes for other uses. Here's what to consider with them.
  7. Retirement

    Additional Streams of Income for Seniors

    Find out how a reverse mortgage can work in your favor during retirement.
  8. Personal Finance

    Behind the Scenes of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
  9. Investing

    Understanding The Mortgage Payment Structure

    While a mortgageā€™s size and term set the baseline, the interest, taxes and insurance all influence the amount of the monthly payment.
RELATED FAQS
  1. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
  2. Why does the majority of my mortgage payment start out as interest and gradually ...

    When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the ... Read Answer >>
  3. I've come into a large amount of money. Should I invest it or pay off my mortgage?

    There is no simple answer to this question as it depends on a number of key factors, namely the aspects or criteria of your ... Read Answer >>
  4. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
Trading Center