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Discussion Starter #1 (Edited)
My question is about using a mortgage on a principle residence as an investment loan. The motivation for this would be that principle residence mortgages tend to be offered at attractive interest rates, and generally better than HELOC rates.

Is it possible to use such a mortgage to fund an investment account, use a HELOC to cover interest payments on the mortgage in order to capitalize the interest, and make principle repayments out of pocket? I imagine principle repayments could also be made with payments from the investment account, but this seems murkier in terms of maintaining interest deductibility.

One ought to also be able to roll the LOC balance back into the mortgage when the term is renewed, without compromising the deductibility of the mortgage interest. This point is key, otherwise the investment account would need to be liquidated, the mortgage repaid, with a new mortgage created to repeat the process.

The main disadvantage that I can see is that with a closed mortgage, you cannot readily unwind the investment loan should you decide to liquidate your portfolio. Also, obviously it would be best to do this with a property with no outstanding mortgage.

Thoughts?
 

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My question is about using a mortgage on a principle residence as an investment loan.
A mortgage is used as borrowed money to finance your residential house purchase and that's what it is. It would not be a loan for investments that produce income. Even if you could consolidate investment debt into a larger mortgage refinance, record keeping could be a nightmare and I would be concerned about proving my case to the CRA if audited.

andrewf said:
Is it possible to use such a mortgage to fund an investment account, use a HELOC to cover interest payments on the mortgage in order to capitalize the interest, and make principle repayments out of pocket?
:confused: I don't think so. This is just shuffling the interest portion of the mortgage debt to the HELOC. The HELOC balance will grow too fast, you won't be able to service the min payment, not with income investments in today's market.


Why don't you do the real Smith Manouver?
 

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Discussion Starter #3
This is for a house with no existing mortgage. The goal is to borrow more cheaply than with a HELOC. All of the proceeds of the mortgage would go to the investment account.
 

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My understanding is the same as bigcake, this is easy to do (just keep a clear trail that you borrowed the money then promptly invested it).

Paying off a mortgage early if you liquidate the portfolio isn't the end of the world (you'll just pay a penalty). Have a close look at the allowed prepayments of the mortgage you get if you might want to do this in the future...
 

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You can take out a mortgage on a property you already own to purchase investments. I am not sure if you can get around the principle payments I would ask a tax account to clarify that. Products like RBC Homeline Plan and Scotiabanks Total Equity Plan allow you to hold multiple mortgage and credit line segments within one plan and also allows you to reallocate funds from a credit line into a mortgage without any additional legal fees once set up.
 

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andrewf said:
Is it possible to use such a mortgage to fund an investment account, use a HELOC to cover interest payments on the mortgage in order to capitalize the interest, and make principle repayments out of pocket?
Sure its possible, but why would you want to carve up your payments that way? If you want to capitalize the interest, just pay the entire mortgage payment out of the HELOC, and then divert whatever amount you want to, out of pocket, toward the HELOC. The end result is identical and interest deductibility is preserved either way.

I imagine principle repayments could also be made with payments from the investment account, but this seems murkier in terms of maintaining interest deductibility.
Not murky at all ... if you use the investment income stream to make principal repayments, the balance of the loan retains full deductibility ... and if you sell assets to make principal repayments, the balance of the loan retains full deductibility.

One ought to also be able to roll the LOC balance back into the mortgage when the term is renewed, without compromising the deductibility of the mortgage interest.
Doing so would have no effect on interest deductibility ... therefore, there'd be no need to liquidate the portfolio ... but you MIGHT need to re-register a new mortgage anyway, depending on how your mortgage is structured in the beginning. Not all mortgages are re-advanceable.

Open mortgages are available ... think of the extra interest as an insurance premium to reduce risk.
 
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