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Weekend Tip: Debt Swapping With a Readvanceable Mortgage

—The Mortgage Report: Saturday Edition—

  • The Readvanceable Shuffle: Got a fixed rate above 3% in a readvanceable mortgage? Does your lender let you lock in the HELOC portion to a low-cost short-term fixed rate? If so, here’s a tip that might save you some interest.
    Jargon Buster: A “readvanceable mortgage” is one that has a regular amortizing mortgage linked to a HELOC.
    For folks with readvanceables, like an RBC Homeline or National Bank All-in-One, “There is an opportunity to bring down interest costs by using a HELOC to make prepayments,” says Jason Heath, Managing Director at Objective Financial Partners Inc. “I have clients with fixed rates from a couple years ago in the 3.5% range. Someone like that with a 10-20% annual prepayment limit, a high HELOC credit limit and an upcoming anniversary date could make a 10-20% prepayment now (on the fixed portion, using their HELOC), 10-20% after their anniversary date, and therefore get up to 40% of their mortgage at a 1.25 percentage point lower rate.” One could then turn around and lock that HELOC debt into a much lower short-term fixed rate. This strategy works best if you’re near your mortgage anniversary date. In that case, not only can you double your prepayment (since most lenders allow only 10-30% prepayments per year) but you can line up your maturities nicely. In other words, if you have two years left on the main 5-year fixed portion, you can prepay it using your HELOC and then roll that HELOC debt into a cheaper 2-year fixed. That way, the original 5-year fixed portion and 2-year fixed portion renew at the same time. This lets you leave your lender at maturity, if necessary, for a better deal elsewhere — with no prepayment penalty.
  • TD Cuts: The nation’s second-largest bank has lowered the following advertised specials:
    • Fixed rates:
      • 3yr: 2.49% to 2.34%
      • 5yr: 2.57% to 2.39%
      • 5yr (high ratio): 2.37% to 2.29%
    • Variable rate: 
      • 5yr: 2.20% to 2.15%
  • Inflation Subdued Despite Massive Fiscal Spending: “While there certainly is quite a lot of disruption to the supply side of the economy, that’s likely to be dominated by the huge hit to aggregate demand,” Evercore ISI Vice Chairman Krishna Guha told CNBC. It now appears, however, that core inflation may not dive as much as economists first feared. If so, that could limit the future downside for 5-year fixed mortgage rates, which are already as low as 1.66% for default-insured purchases closing by August 31.
  • Rate Trivia: On July 2, 2009, Sweden’s Riksbank (the world’s oldest central bank) became the first monetary authority to drop a country’s key lending rate below zero.

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  • Dave says:

    Do all re-advanceable mortgages let you move your line of credit balance into a fixed mortgage?

    What about Scotia Bank?

  • Scot says:

    If you have a readvanceable mortgage (HSBC equity power) but don’t use any of the HELOC, are the switching costs at term-end still higher? Are most lenders covering this to earn business?

  • The Spy says:

    Hi Dave,

    Many readvanceables allow HELOC borrowing to be locked in, but far from all.

    And yes, if you have a Scotia STEP readvanceable, you can request the bank lock some of your HELOC debt into a regular fixed mortgage.

  • The Spy says:

    Hi Scot,

    The manually readvanceable Equity Power Mortgage is a collateral charge which means virtually no lender will accept it on assignment (which is usually necessary for most “free switch” programs). If you want to change lenders, the new lender will almost always ask that a collateral charge be refinanced. That entails legal, appraisal and discharge fees if done at maturity (renewal time). A small minority of lenders pay all three costs in order to win your business. Most still don’t. Other lenders provide cash rebates in general, which you can use to cover closing costs.

  • Tom says:

    Hi Spy,

    Following up on your answer to Scot above, If I currently I have a collateral mortgage and want to switch to another lender with also a collateral mortgage, can this be done by a “free switch” without discharging the original mortgage, thus avoiding the fees associated with refinancing the mortgage (title insurance, appraisal, discharge and legal fees)?

    Can a mortgage with a HELOC be structured as a Traditional, not a Collateral, Change?

    Thank you for your insights. I learned a lot about mortgages by reading your posts.

    • The Spy says:

      Hi Tom, Readvanceable mortgages are virtually never accepted on assignment like a regular mortgage. So fees almost always apply when you change lenders. Although, like I say, those fees can sometimes be offset because certain lenders offer cash rebates and/or pay some of the fees directly. That includes many of the big banks. A broker can tell you who the others are.

  • Mike says:

    Got quoted a rate of 1.95 for a closed variable from RBC. Curious if folks here feel this is a good rate OR received similar rates from banks or fair penalty lender? Thanks.

    • The Spy says:

      Hey Mike, Prime – 0.50% (1.95%) is decent for a big bank in this environment. Although, depending on your financing needs you can find as low as 1.63% elsewhere:

      Most variable rates come with 3-month interest penalties. Hence, using a fair penalty lender is more relevant if you’re getting a longer-term fixed rate. That said, beware that a few of the cheapest variables do have high penalties, like 3% of the mortgage balance. This should be specified in the rate notes for such products, but always confirm with the mortgage provider directly.

  • Jay says:

    Hi Spy
    So who has the best readvanceable product right now if the only criteria are best mortgage rates and automatically readvanceable.

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