HELOC to Invest in Stocks: What You Need to Know

Investing with money from a HELOC

There are some practical points and cautions to consider, Jackie. Before addressing your specific situation, it’s useful to review the risks and characteristics of borrowing to invest.

Using borrowed money to invest magnifies both gains and losses. That leverage can boost returns when markets rise, but it can also increase losses if markets fall. Borrowed investing is best suited to investors with a higher risk tolerance, a long investment horizon, and low ongoing fees on their portfolios.

Leveraging for short-term goals is particularly risky because stock markets can experience extended downturns. Even diversified portfolios can suffer several consecutive years of poor returns. If you’re a balanced investor paying high management fees, the cost of borrowing (interest plus fees) can easily erode or eliminate any extra returns.

When interest is tax-deductible

Interest on borrowed funds used to buy taxable investments is generally deductible. That means you can typically claim interest on money borrowed to invest in a non-registered investment account. However, interest is not deductible when borrowing to fund registered accounts such as an RRSP or TFSA.

In Canada, interest on investment-related borrowing is usually claimed on line 22100 of the T1 personal tax return, which also covers other carrying charges like investment-management fees and certain accounting fees. Note, though, if your investments only produce capital gains and you have no other investment income, interest may not be deductible in some provinces. Quebec, for instance, has specific provincial rules that can limit deductibility when interest expenses exceed investment income for the year.

Comparing a HELOC to a mortgage

You said you borrowed using a HELOC. Because HELOCs commonly require interest-only payments, the monthly outlay is often lower and, when used to invest in eligible taxable investments, that interest is generally deductible. But HELOC interest rates are typically higher than the rates available on mortgages.

HELOC pricing is usually tied to the prime rate plus a margin, while variable-rate mortgages can sometimes be priced below prime. If your HELOC interest is deductible but noticeably higher than comparable mortgage rates, it might make sense to convert the borrowing into a mortgage secured by your new property—if that’s possible—because lower interest costs improve the chances that leverage will be profitable. Bear in mind, switching to a mortgage increases principal repayments, which raises your cash-flow requirement even as it reduces interest expense.

Is it possible to port a HELOC?

If you’re buying a new home, you may be able to transfer—or “port”—the debt to the new property. Many lenders allow you to move a mortgage from one property to another, and a HELOC is often treated similarly. Your lender could arrange to pay off the original HELOC and open a new HELOC secured by the property you’re purchasing, sometimes on the same day as closing. If that option is available to you, it preserves the debt and the tax-deductibility of the interest.

Alternatives to maintain deductibility

If porting isn’t possible because you’re planning to rent or if the sale and purchase dates don’t align, there are other options to consider for preserving tax-deductible borrowing tied to investment activity.

One option is to use an unsecured personal line of credit or apply for a new one. You could use it to pay off the secured HELOC and continue borrowing for investment purposes. Another strategy is to move your investments into a margin account, which allows you to borrow against those investments; you could then use margin borrowing to replace the HELOC financing and, in many cases, retain interest deductibility on the borrowed funds.

Keep in mind that unsecured lines of credit and margin borrowing often come with higher interest rates than a secured HELOC. Also, if you sell investments and later want to re-establish leverage, you’ll need to ensure the borrowing is clearly connected to investment activity to claim the interest as an expense.

Final thoughts on using a HELOC to invest

Borrowing to invest can work for some investors, but it increases risk and requires careful planning. If you plan to continue leveraging, aim to reduce your cost of borrowing, hold low-cost equity investments for the long term, and ensure the borrowed funds remain tied to taxable investments to preserve interest deductibility.

Most Canadian investors do not borrow to invest. If you choose to use leverage, be conservative where possible and structure the borrowing so it aligns with tax rules and your financial tolerance for risk.

Read more about HELOCs:

• Borrowing money to invest
• Using a HELOC as an investment strategy: not as taboo as you might think
• How to use equity to buy a second home
• Should you borrow to invest with the Smith Manoeuvre?