Using Your Property Equity to Invest | Mortgage Guide

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Equity accumulated in a residential property is one of the most powerful financial levers for real estate investors in Canada. In Quebec, two main mechanisms allow access to this equity: mortgage refinancing and the home equity line of credit (HELOC). Refinancing involves replacing the existing mortgage with a new, larger loan, allowing the difference to be withdrawn as cash. Under OSFI Guideline B-20, the maximum loan-to-value ratio for residential refinancing is 80%. A HELOC works differently: it provides a revolving line of credit secured by the property, with the combined limit including the mortgage not exceeding 80% of the property's value, and the HELOC portion itself not exceeding 65% of value under OSFI rules. The HELOC interest rate is variable, usually prime plus a margin. The borrower must qualify under the stress test at the contractual rate plus 2% or the floor rate of 5.25%, whichever is higher. For investors, this strategy allows mobilizing funds for a down payment on a rental property without selling the existing property. However, it increases total indebtedness and financial risks in case of a real estate market downturn.

Property Equity: A Powerful Investment Lever

Every mortgage payment you make and every increase in your property's market value builds your equity -- the difference between your property's value and your mortgage balance. For real estate investors in Quebec, this accumulated equity represents an accessible source of capital without having to sell the property. Two financial vehicles allow you to access it: mortgage refinancing and the home equity line of credit (HELOC).

Mortgage Refinancing

Refinancing involves replacing your current mortgage with a new, larger loan. The difference between the new loan and the old mortgage balance is paid to you in cash. Under OSFI Guideline B-20, applicable to federally regulated financial institutions, the maximum loan-to-value ratio for refinancing is 80%. The borrower must qualify at the higher of the contractual rate plus 2% or the qualifying floor rate (5.25%, in effect since June 2021). Refinancing may trigger a prepayment penalty if the current term has not expired.

Home Equity Line of Credit (HELOC)

The HELOC is a revolving line of credit backed by your property's value. Under OSFI rules, the HELOC component cannot exceed 65% of the property's value, and all secured credit products combined (mortgage + HELOC) cannot exceed 80% of value. The interest rate is variable, usually the bank's prime rate plus 0.50% to 1.00%. The main advantage of a HELOC is its flexibility: you only borrow what you need, when you need it, and you only pay interest on the amount used.

Strategy: Financing a Rental Property Down Payment

The most common strategy is using your primary residence equity to fund the down payment required to purchase a rental property. For example, if your residence is worth $600,000 and your mortgage balance is $300,000, you have $300,000 in equity. By refinancing to 80% of value ($480,000), you can free up to $180,000 in cash. This amount could serve as a 25% down payment on a $720,000 rental property. It is crucial to verify that your total income can support both mortgages and to set aside reserves for vacancy and unexpected expenses.

Tax Advantage: Interest Deductibility

A significant tax advantage flows from this strategy. In Canada, interest paid on borrowing used to earn investment or business income is tax-deductible under paragraph 20(1)(c) of the Income Tax Act (R.S.C. 1985, c. 1, 5th Supp.). If funds withdrawn through refinancing are used exclusively to acquire a rental property, the corresponding interest becomes deductible from rental income. It is essential to maintain a clear separation between funds used for investment and those used for personal purposes. Consult an accountant or tax specialist to properly structure this transaction and maintain adequate documentation.

Frequently Asked Questions

What is the difference between refinancing and a HELOC for accessing equity?

Refinancing replaces your current mortgage with a new, larger loan and you receive the difference in cash, at a fixed or variable rate of your choice. A HELOC is a revolving line of credit secured by your property, at a variable rate, allowing you to borrow and repay flexibly. Refinancing is better suited for a single large amount, while a HELOC offers more flexibility for gradual withdrawals.

How much equity can I withdraw from my property?

Under OSFI rules (Guideline B-20), you can refinance up to 80% of your property's market value. If your home is worth $500,000 and your mortgage balance is $250,000, you could theoretically refinance up to $400,000 and withdraw up to $150,000 in cash, subject to your stress test eligibility.

Are there penalties for refinancing before the term ends?

Yes, if you refinance before your current mortgage term ends, a prepayment penalty applies. For a fixed-rate loan, the penalty is the higher of three months' interest or the interest rate differential (IRD). For a variable-rate loan, the penalty is typically three months' interest. Wait until renewal if possible to avoid these fees.

Are interest payments on equity withdrawn for investing tax-deductible?

In Canada, interest paid on borrowing used to earn investment or business income is generally tax-deductible under paragraph 20(1)(c) of the Income Tax Act. If you use withdrawn funds to purchase a rental property, the corresponding interest is deductible from your rental income. It is essential to maintain clear records of how the funds were used.

What are the risks of using equity to invest?

Key risks include increased total indebtedness, exposure to property value declines (both your residence and investment), potential interest rate increases (especially with a variable-rate HELOC), and difficulty covering two mortgages during extended rental vacancies. Rigorous planning and cash reserves are essential.