Big banks reign over Canada’s mortgage market, but one segment that they particularly dominate in is readvanceable mortgages.
If you want a good readvanceable you have very few choices outside of the Big 6 banks. Meridian Credit Union is one of those very few.
The company’s Flex-Equity Mortgage Line has all the trappings of a major bank readvanceable, with added benefits. Not to mention, it currently has the lowest lender-offered 5-year fixed rate in Canada for a readvanceable mortgage.
The Basics: What is a Readvanceable Mortgage?
In simple terms, it’s a mortgage linked to a line of credit (HELOC).
When you pay down the mortgage principal, it lets you re-borrow that same amount from the credit line.
Readvanceables are a convenient source of low-cost, on-demand funds. People use the credit line for renovations, investing, personal expenses and even as a substitute for an emergency fund.
How does Meridian’s Flex-Equity Mortgage Work?
The Flex-Equity Mortgage lets you couple any of Meridian’s fixed or variable terms with an automatically readvanceable line of credit.
Here’s how it works:
Let’s suppose you make a $1,000 monthly mortgage payment and $600 of that is principal. The Flex-Equity Mortgage lets you re-borrow that $600 from the revolving line of credit.
This “re-balancing” of available credit happens automatically on the third of every month, meaning your LOC credit limit rises every month as your mortgage balance falls.
- Maximum loan-to-value: 80% (even the revolving portion can be up to 80% of your home value)
- Lump-sum prepayment and payment increase option: 20% annually
- Maximum amortization (mortgage portion): 25 years
- Occupancy: Owner-occupied principal residences only
- Portability: Yes, throughout most of Ontario (for the mortgage portion only; the HELOC portion must be re-set-up)
- Maximum LOC amount: $800,000
- Maximum property value: $2 million
- Skip-a-payment option: Yes
- Compounding: Monthly (line of credit); Semi-annually (mortgage portion)
- Availability: Ontario only. Through Meridian branches and mortgage specialists (it’s coming to the mortgage broker channel in the “near future,” says Meridian)
Let’s start with the rate. As of today (September 19, 2019), it’s the best in the business at 2.49% for a 5-year fixed. The LOC rate is a typical prime + 0.50%, or 4.45%.
But Meridian’s real edge is flexibility. It’s a provincially-regulated credit union, so it’s not bound by various federal mortgage restrictions. That lets it do things that big banks can’t.
One of those things is lending you a revolving line of credit for up to 80% of your home’s value. Banks are limited by OSFI (the bank regulator) to 65%. Meridian lets you borrow more money—which ideally you’ll use for prudent and productive purposes, like investing, building your business or making value-adding home improvements.
Another Meridian edge you don’t get at a bank is qualifying flexibility. Because Ontario regulators are sensible enough to let credit unions impose their own underwriting limits, Meridian isn’t hamstrung by the federal mortgage stress test.
Here’s how Meridian describes it:
We use the stress test to help evaluate whether a mortgage is a good fit for you. We don’t want you to take out a mortgage that you can’t actually afford. However, we don’t disqualify people for mortgages based solely on the results of the stress test. As a provincially regulated financial institution, we have more flexibility when it comes to the mortgages we offer and approve. The stress test is a great way to evaluate risk, but there are factors it doesn’t take into account, like income appreciation, accelerated payment options, and overall principal reduction. We work hard to find flexible solutions to help you afford your dream home, even if you don’t pass the stress test.
That’s the same sound lending approach that credit unions like Meridian have taken for years, long before the government’s 2018 uninsured stress test came to town.
What it means is that a client with strong credit, but a justifiably and/or temporarily high debt ratio, can potentially get approved for a bigger mortgage at Meridian than a bank. Just keep in mind that a modest interest rate premium may apply if you can’t qualify under OSFI rules.
If you need to refinance, there’s one last “pro.” Meridian lets you increase your mortgage with no penalty, assuming you qualify. It does that by blending your old and new interest rates. And given Meridian mortgage rates are pretty competitive and transparent (unlike some lenders we know), its “blend and increase” feature is actually a benefit.
There’s not much to dislike about the Flex-Equity Mortgage, but we have a few criticisms:
- Meridian allows only one line of credit sub-account. That means you can’t compartmentalize borrowing to track interest separately for personal and investing/business use. Most big banks have this important feature. That limitation also makes Meridian’s product less useful for strategies like the Smith Manoeuvre. Albeit, if you solely use the LOC for the Smith Manoeuvre, you can easily move money to and from the LOC account (enabling you, for example, to transfer from the LOC to a chequing account for further transfer to your third-party stock brokerage account).
- It’s a collateral charge, meaning it may be more expensive to switch lenders at renewal. This is usually only a factor if a lender doesn’t quote you good rates at renewal. In our experience, however, Meridian is quite competitive. Moreover, if you want a readvanceable mortgage (regardless of the lender), it must be collateral. So this isn’t that much of a “con.”
- Meridian does not have a low-cost penalty if you break its fixed-rate mortgage portion before maturity (albeit, its penalty is not worse than the big banks).
We love the fact that Meridian lends up to 80% loan-to-value on the credit line (no bank does that). It’s also a flexible product overall, especially for people who may not qualify for the credit limit they want at a big bank.
Alas, it’s not perfect. A fairer fixed-rate breakage penalty and more than one LOC account would make it the clear leader in the space.
All in all, however, the Flex-Equity Mortgage is a winner and should be on your shortlist if you’re shopping for a readvanceable mortgage.