Parlaying money raised through a second mortgage, or from a home equity line of credit, to invest in an income producing rental property is a financial strategy that allows you to tap into the equity in your home – a financial asset that would otherwise appreciate only on paper, and only in proportion to any increase in your property value. And, if used for investment purposes or to produce income, interest paid on that second mortgage would be tax deductible.
However, there are risks to such an investment strategy – particularly risks that interest rates will rise over the term of the mortgage. And these risks are currently all too real given today’s current low interest rates. A successful real estate investment strategy should therefore take into account the probability of eventually paying somewhat higher rates on a second mortgage, irrespective if the second mortgage is a variable or fixed rate product.
A cautionary tale is set out in the Globe and Mail’s Financial Facelift series. It is all too easy for novice investors to get caught in a financial bind that makes their real estate investments (both home and rental property) untenable if – and when – rates rise, if interest rate risk is not factored into their calculations. This is not to say, however, that tapping into your home equity for investment purposes through a second mortgage or home equity line of credit is necessarily an over-risky strategy, provided you go into it with your eyes open and have weighed the different contingencies that might arise.
If you are considering such a strategy – and it has worked successfully for many small investors – it would be prudent to talk with a knowledgeable and experienced mortgage broker to help guide you through any potential pitfalls. While a bank, or other mortgage lender, is primarily focused solely on your ability to repay your mortgage, establishing a good working relationship with a mortgage broker who understands your investment strategies will benefit you over time – particularly if you foresee further real estate investments as part of your broader financial planning.
