A readvanceable mortgage is a home loan bundled with a line of credit that grows automatically as the borrower pays down principal, letting them re borrow whatever they have repaid. In practice it works like a standard mortgage stitched to a home equity line of credit, or HELOC, so the credit available rises in step with each payment.
At a Glance
- A readvanceable mortgage pairs a home loan with a HELOC that expands as the principal shrinks.
- Net debt typically stays flat because reborrowed funds replace what was just paid off.
- In Canada, interest on reborrowed funds used for investing can be tax deductible under the Smith Maneuver.
- The line of credit portion usually carries a noticeably higher interest rate than the mortgage itself.
- The strategy has no equivalent in the United States, where mortgage interest is already deductible.
How the Structure Actually Works
Picture a typical mortgage payment: part goes to interest, part goes to principal. With an ordinary loan, that principal payment simply reduces what you owe. A readvanceable mortgage does something different. As soon as principal is paid down, that same amount becomes available again through the attached line of credit, usually reborrowed automatically. The catch is that the line of credit charges a meaningfully higher rate than the mortgage rate itself.
Because the borrower can immediately draw back what they just paid off, their overall net debt tends to hold steady rather than decline the way it would under a conventional amortization schedule. That single feature is why some investors and advisors view these products skeptically. You are not really shrinking your debt load unless you are disciplined about what you do with the reborrowed money.
Where the Smith Maneuver Comes In
The tax angle that makes readvanceable mortgages appealing in Canada is a strategy called the Smith Maneuver, created by Vancouver Island financial planner Fraser Smith and popularized in his 2002 book of the same name. Smith described it as a debt conversion strategy rather than simple leverage, arguing it could generate tax refunds, speed up mortgage payoff, and build a bigger retirement portfolio over time.
Under Canadian tax rules, interest on borrowed money used for investment purposes can be deducted. So a borrower who reborrows through the line of credit and puts that money into investments, rather than spending it, may be able to deduct the interest charged on that borrowed portion. The resulting tax refund can then be applied straight to the mortgage principal, which in theory shortens the time it takes to pay off the loan.
None of this happens passively. The borrower has to actively manage the reinvested funds well enough to outrun the higher interest rate charged on the line of credit portion. That is a meaningfully different task than simply making a mortgage payment every month, and it assumes markets cooperate.
A Worked Example
Take a $250,000 readvanceable mortgage at a 5% rate amortized over 25 years. Monthly payments come to roughly $1,460, split between about $460 toward principal and $1,000 toward interest, as a rough illustration. Under the readvanceable structure, that $460 becomes available again each month through the line of credit. Over a year, that adds up to $5,520 in available credit.
If the homeowner reinvests that $5,520 and the line of credit rate happens to climb to 10%, the interest on that reborrowed amount is still deductible at tax time in Canada. The resulting refund can then be funneled back against the mortgage principal, accelerating repayment beyond what a standard mortgage schedule would produce, assuming the investment and tax mechanics work out as planned.
Comparing Readvanceable Mortgages and All in One Loans
All in one mortgages resemble readvanceable mortgages in that both combine a home loan with fast access to equity. The difference is the plumbing. An all in one product also includes a linked checking or savings account, and any surplus cash sitting in that account gets applied against the mortgage principal before interest is calculated, which is a distinct mechanism from the automatic reborrowing found in a readvanceable mortgage.
What the Tax Rules Mean Outside Canada
The Smith Maneuver is a Canadian creation because it is built around Canadian tax law, specifically the deductibility of investment loan interest. It does not translate to the United States, where mortgage interest is generally already tax deductible, removing the core incentive that makes the maneuver worthwhile north of the border.
How Much Risk Is Really Involved
Because the strategy depends on investing borrowed money, the risk is real, not theoretical. Investment values can fall just as home values can fall, and a borrower who reborrows against home equity to invest is exposed on both fronts simultaneously. Anyone weighing this approach would be wise to talk it through with a financial advisor rather than assume the tax benefit alone justifies the exposure.
Who Should Actually Consider This
A readvanceable mortgage is not a shortcut to a debt free home; it is a tool that reshapes how debt is structured, with a tax angle attached for Canadian borrowers willing to invest actively and monitor rate spreads. Whether it fits depends heavily on risk tolerance, investing discipline, and how comfortable someone is watching their net debt stay flat while betting that reinvested funds and tax refunds will eventually outpace the higher borrowing costs attached to the credit line.