Definition of a Readvanceable Mortgage
A readvanceable mortgage is a feature of some mortgage lines of credit, including home equity lines of credit (HELOC).
With a readvanceable mortgage, the borrower’s line of credit is increased as the borrower makes payments to the mortgage and reduces the principal of the original mortgage. The increase in the line of credit may be upon lender approval or automatically upon the reduction of principal. Usually a new application is not required to increase the line of credit.
Mr. McGillicuddy has a line of credit on a readvanceable mortgage of $200,000. He has used the entire $200,000 line of credit, and is repaying at 5% interest, amortized over 20 years, with a monthly payment of $1,314.25. Mr. McGillicuddy’s mortgage payment will pay $824.78 towards interest, and $489.74 to reduce the principal. In a readvanceable mortgage, the $489.74 reduction in principal will be eligible to increase Mr. McGillicuddy’s line of credit.
If the readvanceable mortgage is automatic, Borrower A is able to borrow against the $489.74 immediately A readvanceable mortgage is much like the line of credit offered by a credit card company. As the balance is paid down, the amount eligible to borrow against increases.
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Advantages of a Readvanceable Mortgage
Because the borrower is borrowing against a line of credit, they are not required to complete a new application, obtain a new appraisal or submit new loan documents for each advance against their line of credit. Unlike a credit card or other forms of unsecured loans, the interest rate and repayment terms are usually more favorable.
Disadvantages of a Readvanceable Mortgage
As the borrower seeks readvances to their line of credit, they are affecting their equity in their property. As with any form of borrowing, the ease of credit can subject a borrower to overextending themselves. Fortunately, with readvancing mortgages, the ability to overextend is limited, as the original line of credit requires the borrower to retain equity in the property and places an upward limit on the line of credit.
At Firstfoundation.ca, we have lenders with a number of readvanceable mortgage products available. After discussing both your present and future needs with us, we will be able to direct you to the best product available.
If you are interested in learning more about readvanceable mortgage, please feel free to contact us today!