This guide covers the ways to borrow against your home to invest: drawing on a home equity line of credit (HELOC), a cash-out refinance, and using equity for a rental property down payment, along with the CRA rules for deducting the interest and the risks of each. It is part of WealthNorth’s guide to investment property financing.
Ways to use home equity for investing
| Strategy | How it works | Interest deductible? | Risk |
|---|---|---|---|
| HELOC investing | Borrow a lump sum from a HELOC and invest it in a non-registered account | Yes, if the investments can produce income | High |
| Smith Manoeuvre | Re-borrow each mortgage payment’s principal through a readvanceable mortgage and invest it | Yes, on the invested portion | High |
| Rental property down payment | Use a HELOC or refinance on your home to fund the down payment on a rental | Yes, the rental earns income | High |
| Cash-out refinance | Refinance to a larger mortgage and invest the difference | Yes, on the part traced to investments | Medium to high |
| Business investment | Lend or invest equity in a business you run | Yes, if used to earn business income | Very high |
The Smith Manoeuvre is the gradual version: it turns your existing mortgage into a deductible investment loan one payment at a time, without increasing total debt. The mechanics, the CRA rules and a 25-year projection with the interest cost included are in the Smith Manoeuvre guide.
How much you can borrow
At a federally regulated lender, two limits apply: the revolving part of a HELOC can't exceed 65% of the home's value, and everything borrowed against the home (the mortgage plus the HELOC, or a refinanced mortgage) can't exceed 80% of its value. HELOC room is therefore the lower of 80% of the value minus the mortgage and 65% of the value. Mortgage insurance can't take a refinance above 80%, except a refinance to build secondary suites that takes no equity out. The first limit is set by OSFI’s Guideline B-20, the second by federal law such as the Bank Act. Both are measured against the home’s appraised value, which you can estimate first with the methods in how much is my house worth. HELOC vs refinance compares the two ways of getting the money out, and the HELOC calculator estimates your available room.
HELOC investing
- Draw from the HELOC, ideally from a segment used only for investing.
- Transfer the money straight to a non-registered investment account.
- Buy investments that can produce interest or dividends.
- Claim the HELOC interest on line 22100 of your return.
- Pay the interest monthly; investment income is taxable each year.
What you can invest in and still deduct the interest
| Investment | Interest deductible? | Why |
|---|---|---|
| Dividend-paying stocks and ETFs | Yes | Can produce dividend income |
| Bonds, bond ETFs and GICs | Yes | Produce interest income |
| REITs | Yes | Pay distributions |
| Shares that pay no dividend yet | Usually | The CRA’s interest deductibility folio says the purpose test will likely be met when a company is silent on dividends, but not when it says it doesn’t and won’t pay them |
| Assets that can only produce a capital gain (gold, cryptocurrency) | No | If the only earnings an investment can produce are capital gains, the interest isn't deductible. |
| RRSP, TFSA or FHSA contributions | No | The CRA lists interest on money borrowed for these contributions as not deductible |
| Your own home or personal spending | No | Not used to earn income |
The deduction follows the current use of the money. If you sell an investment and spend the proceeds, the interest on that part of the loan generally stops being deductible, so proceeds are usually reinvested or used to repay the HELOC.
Using home equity for a rental property
One way to buy a first or second rental is to use a HELOC or refinance on your home for the down payment and take a separate mortgage on the rental.
| Component | Details |
|---|---|
| HELOC on your home | Funds the rental’s down payment; interest is deductible because the money bought an income-producing property |
| Mortgage on the rental | A separate mortgage, usually uninsured; at least 20% down |
| Qualification | Lenders count the HELOC payment in your debt ratios and part of the expected rent as income |
| Rental mortgage interest | Deductible as a rental expense |
Example: a $400,000 rental financed entirely with borrowed money
Illustrative assumptions: an $80,000 HELOC draw at 6.5% (interest only) for the 20% down payment, a $320,000 rental mortgage at 5.0% over 25 years, rent of $2,200 a month, property tax of $3,600, insurance of $1,800 and a maintenance reserve of $1,320 a year.
| Line | Per year |
|---|---|
| Rent | $26,400 |
| Rental mortgage payments ($1,861 a month) | −$22,334 |
| HELOC interest (6.5% on $80,000) | −$5,200 |
| Property tax, insurance, maintenance | −$6,720 |
| Pre-tax cash flow | −$7,854 |
For tax, only the interest is deductible, not the principal part of the mortgage payments. In year one about $15,686 of the mortgage payments is interest, so deductible expenses total about $27,606 against $26,400 of rent: a rental loss of about $1,206, worth about $483 at a 40% marginal rate. The deductions mostly shelter the rent itself; they don’t refund a share of the whole interest bill. The property works only if principal paydown and appreciation outweigh a shortfall of this size. How rental profit and losses are taxed is covered in how rental income is taxed, and the full rules on deductible interest in when mortgage interest is tax-deductible. To test a specific property, use the rental property calculator.
Risk analysis
| Risk factor | HELOC investing or Smith Manoeuvre | Rental property down payment |
|---|---|---|
| Home at risk if you can’t pay | Yes, the HELOC is secured by your home | Yes, and the rental is mortgaged too |
| Investment can fall in value | Yes | Yes |
| Monthly cash flow strain | The HELOC interest, which rises with rates | HELOC interest plus any rental shortfall |
| Liquidity | High: investments can be sold in days | Low: a property takes months to sell |
| Margin calls | None: a HELOC isn’t a margin loan | None |
Leverage tends not to suit anyone with unstable income, a short time horizon, no emergency fund, existing high-interest debt, or unused TFSA and RRSP room. It tends to suit households with stable income that can carry the interest if investments fall, a long horizon, a large equity cushion and a higher marginal tax rate.
Keeping the deduction
| Mistake | Problem | Fix |
|---|---|---|
| Mixing personal and investment draws in one account | The investment use becomes hard to trace | Use a separate HELOC segment for investing only |
| Routing the money through your chequing account | Muddies the paper trail | Transfer straight from the HELOC to the investment account |
| Selling investments and spending the proceeds | The deduction ends on the spent portion | Reinvest the proceeds or repay that part of the HELOC |
| Contributing borrowed money to an RRSP, TFSA or FHSA | Not deductible | Invest only in a non-registered account |
| Holding assets that can only produce capital gains | Not deductible | Hold investments that can pay interest or dividends |
When to reduce the leverage
| Trigger | What people commonly do |
|---|---|
| Retirement approaching | Sell investments gradually and repay the HELOC |
| Income becomes uncertain | Reduce the balance to lower the monthly interest |
| Rates rise sharply | Reassess: the investments’ after-tax return needs to beat the after-tax borrowing cost |
| Selling or moving | The HELOC must be repaid from the sale, so plan which investments to sell |
Related pages
Sources
The figures and rules on this page come from these sources, last checked against them between September 25, 2026 and October 2, 2026. How we check facts.
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Data table
- Canada Revenue Agency: Line 22100 – Carrying charges, interest expenses and other expenses
- Canada Revenue Agency: Income Tax Folio S3-F6-C1, Interest Deductibility
- CMHC: CMHC Refinance for Building Secondary Suites
- Financial Consumer Agency of Canada: How much you need for a down payment
- Financial Consumer Agency of Canada: Home equity lines of credit
- Justice Laws (Canada): Bank Act
- Justice Laws (Canada): Eligible Mortgage Loan Regulations
- OSFI: Residential mortgage underwriting practices and procedures