HELOC Investment Strategy Calculator

Understanding HELOC Investment Leverage

A HELOC (Home Equity Line of Credit) investment strategy involves borrowing against the equity in your home to invest in income-producing assets such as dividend-paying stocks, bonds, or ETFs. This approach is sometimes called "leveraged investing" or a form of the "borrow to invest" strategy. It can amplify both gains and losses, so it requires careful analysis and risk tolerance assessment.

The Concept of Positive Spread

The core idea behind HELOC investing is the "spread" between your after-tax borrowing cost and your investment return. Because the CRA allows you to deduct interest on money borrowed for the purpose of earning investment income (for non-registered accounts), the effective cost of your HELOC is reduced by your marginal tax rate. If your after-tax borrowing cost is 4.5% and your investment earns 7%, you have a positive spread of 2.5% that compounds over time.

Key Risks to Understand

• Rising Interest Rates: HELOC rates are variable and typically tied to the prime rate. A rate increase directly raises your borrowing cost and can turn a positive spread negative.
• Market Downturns: Your investment portfolio can lose value while your HELOC balance and interest payments remain the same. Unlike a margin account, a HELOC will not trigger a margin call, but the psychological pressure of a large loss on borrowed money can be significant.
• Sequence of Returns Risk: Poor returns in the early years of the strategy are particularly damaging because you are paying interest on the full borrowed amount while your portfolio is declining.
• Liquidity Risk: If your lender reduces your HELOC limit (which can happen if property values decline), you could face unexpected financial stress.
• Emotional Risk: Watching a leveraged portfolio decline can lead to panic selling, which locks in losses and defeats the long-term nature of the strategy.

CRA Rules on Interest Deductibility

Under Canadian tax law, interest paid on money borrowed to earn investment income is generally tax-deductible (CRA line 22100). This includes interest on a HELOC used to purchase stocks, bonds, mutual funds, or ETFs in a non-registered (taxable) account. However, there are important conditions:

• The borrowed funds must be used to earn income from a business or property (e.g., dividends, interest, rental income).
• Interest on loans used to invest inside a TFSA or RRSP is not tax-deductible.
• If you invest in growth stocks that pay no dividends, the CRA may challenge the deduction. It is safest to invest in dividend-paying securities.
• You must maintain clear records tracing the borrowed funds directly to the investment.

When This Strategy Makes Sense

• You have a long time horizon (10+ years) to ride out market volatility.
• You are in a high marginal tax bracket, maximizing the value of the interest deduction.
• You have stable employment income and can comfortably afford the interest payments.
• You have a high risk tolerance and can maintain discipline during downturns.
• Interest rates are relatively low compared to expected investment returns.

When This Strategy Does NOT Make Sense

• You have a short time horizon or may need the money soon.
• You already carry significant debt or have an unstable income.
• You are not comfortable with the possibility of losing more than your initial investment.
• Interest rates are high and expected returns are uncertain.
• You have not yet maximized your TFSA and RRSP contribution room, which offer guaranteed tax advantages without leverage risk.