Simplifying the Differences between Standard and Readvancing HELOC Mortgages

Static/Standard Mortgage- Term/Rate Mortgage
Recommended for: First Time Home Buyers, homeowners who want a simple, traditional “pay-it-off” plan.

A standard mortgage is your mortgage balance, that is locked into a rate (fixed or variable) for a term (1-10 years) and the payment is set by the amortization such as 25 or 30 years.

In a Standard Mortgage, every time you make a payment, your equity is “locked” inside the house. To get that money back out, you usually have to refinance with a new mortgage loan (which costs legal and often appraisal fees) or sell the home.

Pros:
-Competitive Pricing: Often eligible for the “best-of-the-best” promotional rates.

-Lender Portability: Generally easier and cheaper to “switch” or “transfer” to a new lender at renewal if they offer a better rate.

-Psychological Finish Line: Clear structure with a set end date; no temptation to re-borrow the money you’ve worked to pay off.

-Registration Flexibility: Can be registered as a standard charge (though many banks now use collateral charges for all products).

Cons:
– “Locked” Equity: To access your home’s value for a renovation or investment, you must undergo a full refinance, which involves re-qualifying and paying legal/appraisal fees.

– No “Safety Net”: If you have an emergency, you cannot tap into the principal you’ve already paid back without a new loan application.

Readvancing Home Equity Line of Credit (HELOC)- can have a Term/Rate + HELOC.
Best for: investors, homeowners planning renovations, or those wanting a built in emergency fund.

In a Readvancing HELOC, the mortgage and the Line of Credit are linked. We like to think of the Term/Rate mortgage as being “inside” the HELOC.
Every time you make a *payment to your term mortgage portion, a percentage of the principle is “added” to your line of credit. Which means that your line of credit limit increases over time.

Because the limit grows as you pay down the debt, you have an “emergency fund” or “investment fund” that builds itself. You don’t need to ask the bank for permission to borrow that money back; it is already there waiting for you.

Pros:

-Dynamic Liquidity: Automatically creates borrowing room as you pay down your principal (subject to the 65% LTV cap).

-“One-and-Done” Legal: You only pay legal fees once. Future borrowing against equity usually requires no new appraisal or legal work.

-Interest-Only Flexibility: On the HELOC portion, you are often only required to pay interest, which may help with cash flow during tight months.

-Investment Ready: Perfectly structured for strategies like the “Smith Maneuver”.

Cons:

-The “Rate Premium”: The term portion can sometimes carry a slightly higher interest rate than a standard mortgage.

-The Debt Trap: If not disciplined, a revolving limit can lead to “perpetual debt” where the homeowner never truly clears the balance.

–Collateral Charge Required: It must be registered as a collateral charge, which can make it more expensive or “sticky” to move to another lender later.

-The 65% Floor: New rules mean the HELOC won’t start growing until you have 35% equity in the home.

Think of a standard mortgage like a piggy bank you have to smash open to get your money back. A readvancing HELOC is like a revolving door—the money you put in to pay down the house can be pulled right back out to build an investment portfolio.

Disclosure: Understanding the 65% LTV Re-advancement Cap

Under current OSFI (Office of the Superintendent of Financial Institutions) regulations, readvancing HELOC products are subject to a 65% Loan-to-Value (LTV) limit on the revolving portion.

For clients starting at 80% LTV (20% down): Because your initial mortgage balance is above the 65% threshold, your principal payments will not immediately create new borrowing room in your Line of Credit. Instead, your payments will first reduce your total debt until your mortgage balance drops to 65% of the property’s original appraised value. Only once you are below this 65% “floor” will your HELOC begin to re-advance (increase your available credit) as you make principal payments. Essentially, the “reborrowing” feature is paused until you have built 35% equity in the home, which means you will  need to pay off 15% of the home’s value (bringing t down to 65%) before you will see that “revolving door” benefit start to work.

Not a 1:1 Gain: Even once it starts re-advancing, the bank only grants a percentage of the principal back (often around 80% of every dollar paid) to ensure the total limit eventually settles permanently at the 65% cap over the life of the mortgage.