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They're basically offering a re-advanceable HELOC.
All the major banks have them but call them fancy names, Flex Line, home line or whatever.
Yes you could prepay down your mortgage faster to save interest. But when you withdraw those funds from the HELOC it's going to be at a way higher rate.
This strategy is very similar to the Manulife One Account. Probably explains it better than I can.
Reading through how BMO explains it, it seems like pulling money out just adds back to the principle of my mortgage at the same mortgage interest rate, so no extra borrowing expense:
From BMO: “The re-borrowed funds are added to your mortgage principal at your existing interest rate for the remainder of the term.”
So it's not even a HELOC, interesting. I wonder if there is a limit?
It says on the site it's not available with the smart fixed mortgage. I'm wondering if it's like open mortgage with a higher rate?
Edit. So I think only the pre payment money is available, and it's less flexible then a HELOC. But if you were saving for a big purchase like a trip or a car. I think it could work, unless that money can make more else where.
Only the pre payment money is available to withdraw. I can prepay up to 20% of my mortgage every year. This feature of withdrawing your prepayment is available on regular BMO mortgages, I just switched to BMO in a 3yr fixed because they gave me the best rate.
My personal banking is with simplii and I’m not impressed with their HISA so thought about this scheme as a replacement.
Interesting!
I wouldn't really call it a scheme. Saving that interest while you prepay, pays down your mortgage quicker.
You just have to look at the numbers and with rates so high right now I think it makes sense. But I am not an expert.🤣
If your mortgage balance is low, it might make more sense to switch the whole thing to a HELoC. I switched when my mortgage fell below 50% of my original balance. It worked out for me because interest rates were low, and when I was down to about 30% of my original mortgage amount, I received an inheritance that mostly wiped it out, leaving me with a super-cheap line of credit that I used to borrow against so that I could invest.
If your mortgage balance is low, it might make more sense to switch the whole thing to a HELoC.
Could you elaborate on that? I don't understand how a standalone HELOC would be more beneficial than a re-advanceable mortgage. The latter typically combines a mortgage and a HELOC under one umbrella, allowing quicker access to newly-acquired home equity since you can immediately re-borrow the money you've paid off.
A HELoC doesn't have strict repayment terms, and usually has a capped borrowing limit. My original mortgage was $200k. I paid it down to $100k over 10 years. I switched to a HELoC (the rate was about the same) and ended up with a $100k line of credit. I paid it down some more, and then received an inheritance, wiping out the balance completely. I lived mortgage free for a few months, then borrowed to invest in my non-registered savings, writing off the interest expense.
To my understanding, this is how re-advanceable mortgages work: the mortgage portion and the HELOC portion are separate. But, as soon as you make a repayment on the mortgage, your available borrowing limit on the HELOC increases.
This separation is useful, for example, when implementing the Smith Manoeuvre, as you need to keep track of the interest paid on the money borrowed to invest.
However, when renewing, the amount you owe on the HELOC might be incorporated into the mortgage, especially if you switch to a lender that doesn't offer re-advanceable mortgages.
I don't have experience myself, but you sound spot on. You will find a lot of YouTube financial advisors advertising this as a way to pay down your mortgage in half the time.
This sounds interesting. Please correct me if I'm wrong: If you deposit your extra money into this account, you can save 5.15% mortgage rate, which is reducing your interest cost.
If you deposit the money in an HISA, you earn 5.15% interest, and you need to pay income tax for the interest.
Assuming your income is 80k, your marginal income rate is 29% (https://turbotax.intuit.ca/tax-resources/ontario-income-tax-calculator.jsp tells me), so saving 5.15% interest means 7.25% pre-tax interest income.