Few homeowners have learned how it is possible to utilize a home equity line of credit (HELOC) for investment purposes – a topic we have discussed previously on CMI Mortgage News – a strategy that can effectively make all, or a portion of, your mortgage tax-deductible, while tapping into the potential of compound interest to build a substantial investment portfolio.
Tax-deductibility of mortgage costs has long been an enviable feature of U.S. tax law, which allows homeowners a direct deduction of mortgage interest expenses from earned income (which, together with the isolation of mortgage liability to the value of the mortgagee’s home, has added to the long-term growth of American home ownership).
Some financial advisors have explained to their clients the benefits of tapping into existing home equity using a HELOC secured against a principal residence to purchase a conservative investment portfolio focusing of blue-chip ‘widows & orphans’ stocks which pay out a steady dividend stream. Interest paid on the HELOC is directly deductible under the Income Tax Act as an expense “for the purpose of earning income from a business or property,” thereby reducing the homeowner’s earned income (and effectively reducing his or her effective tax rate), while allowing the homeowner to claim and pay the lesser 20 per cent taxation rate on dividend earnings.
Author, David Larock, of the Toronto real estate blog, “move smartly” has e-published a two-part detailed analysis of how homeowners can utilize HELOC’s to effectively make a mortgage tax-deductible (Part 1 and Part 2 are available online). A well-resourced mortgage broker can usually set up a HELOC for investment purposes with interest rates superior to the rates offered by major banks for their comparable products, with the mortgage lender – rather than the mortgagee – picking up the expense of the mortgage broker’s fees and services.
