Categories

Archives

Back to Blog
Interest,Rate,And,Mortgage,Loan,Concept,,Businessman,Analyze,Interests,Rate

Feb 6

How to Use a HELOC to Fund an Investment Property

Author: Chris Allard

Category: Helpful Tips, Mortgages & Rates

How to Use a HELOC to Fund an Investment Property

A Home Equity Line of Credit (HELOC) is a powerful financial tool that allows you to tap into the equity built up in your home over time. For many homeowners in Ottawa, this approach provides a flexible way to grow their real estate portfolio: the funds available can be used to secure a rental property. This offers another key benefit, as HELOCs come with significantly lower interest rates than other borrowing options.

Let’s take a closer look at investment property mortgages—and related HELOC options.

What is a HELOC?

HELOC stands for Home Equity Line of Credit. This is a revolving line of credit secured by the equity in your home.

How a HELOC Works

As with other revolving lines of credit, a HELOC allows you to borrow up to a set limit, repay the funds, and borrow again as needed. Most Canadian lenders allow homeowners to access up to 65% of their home’s appraised value under a HELOC; however, when combined with your mortgage, the total loan-to-value ratio generally can’t exceed 80%.

One of the key benefits of taking out a HELOC is the flexibility it offers. During the approved draw period (often 10 years), you can withdraw as much as you need (up to the limit) and will typically only need to pay interest on the amount borrowed. 

Another thing to note is that major Canadian banks and credit unions, including RBC, TD, and Desjardins, all offer HELOC options with variable rates tied to the Canadian prime rate.

Eligibility Requirements in Ontario

To qualify for a HELOC, you will need to have at least 20% equity in your principal residence and a solid credit profile. Many lenders require a minimum credit score of 650. 

When evaluating applicant eligibility, lenders also assess gross debt service (GDS) and total debt service (TDS) ratios to ensure the applicant can handle additional debt. 

Finally, an appraisal is often conducted to confirm the property’s value before approval is granted.

Why Use a HELOC for Investment Properties?

A HELOC can be a practical, cost-effective path toward long-term wealth growth for several reasons. Many investors choose this route because:

  • There are lower interest rates than unsecured loans or private lending. Because a HELOC is secured against your home, the loan presents lower risk to the lender, thus enabling the lender to offer more favourable rates and terms.
  • It offers flexibility, allowing you to access funds as needed. Structured as a revolving line of credit, a HELOC enables you to draw funds only when you need them and pay interest solely on what you use.
  • Interest is often tax-deductible. When used for income-generating rental properties, HELOC interest can be tax-deductible, though it’s best to confirm specifics with an accountant or a tax advisor.
  • You have the potential to scale a rental portfolio without selling your current home. By using your HELOC funds as a down payment, you can expand your real estate portfolio without selling your current home or dipping into retirement savings.

How to Access a HELOC in Ottawa

If you are interested in securing a HELOC in Ottawa, the first step is to speak with an experienced local mortgage broker, like our team here at Chris Allard. We will guide you through each stage of the process: from assessing your home’s equity and determining your borrowing potential to finding the most competitive rates and terms available for your situation.

Step-by-Step Process

  1. Contact a mortgage broker or lender. We can assess your situation and find HELOC products that fit your financial profile.
  2. Determine your available equity. Most lenders allow borrowing up to 80% of your home’s value, minus any remaining mortgage balance.
  3. The lender or broker will order an appraisal. Lenders will require a professional valuation to confirm the worth of your property.
  4. Submit your application. Provide documentation of income, employment, and existing debts.
  5. Receive approval and access funds. Once approved, you can access your HELOC funds through online banking or linked accounts, much like a credit line.

Work With a Mortgage Broker

Working with a mortgage broker can simplify the entire process of HELOC application and approval. Brokers often have access to specialized HELOC products that are not always advertised by major banks and can help negotiate lower rates.

Using a HELOC to Purchase an Investment Property

There are several ways you can leverage your HELOC to expand your real estate investment portfolio.

Down Payment Strategy

One of the most common uses for a HELOC is to make a down payment on an investment property mortgage. Lenders typically require a down payment of at least 20% for rental properties, and using a HELOC can free up funds for other expenses. 

Note that some lenders may consider HELOC funds as “borrowed money,” so you will need to demonstrate that your income and cash flow can support both the HELOC payment and the new mortgage. Clear documentation and a strong credit profile will surely help your case.

Full Purchase vs. Partial Financing

For smaller investment opportunities, such as a condo or duplex in Ottawa’s outskirts, investors may use their HELOC to purchase the property outright, and without traditional mortgage delays.

Others prefer a hybrid approach: using HELOC funds for the down payment and an investment property mortgage for the remainder. This method allows you to leverage your home equity while keeping interest costs manageable. 

HELOC Risks and Considerations

While HELOCs are valuable tools, they come with real financial risk:

  • Risk of losing your home. Since the line of credit is secured by your home, defaulting could put your primary residence at risk. 
  • Risk of rising interest rates. HELOC rates are variable, meaning monthly payments can increase if the Bank of Canada raises interest rates.
  • Overleveraging risk. Borrowing the full amount available might leave you stretched too thin, especially if your rental income fluctuates or vacancies occur. 

Tax Implications

When HELOC funds are used to purchase an income-producing property, the interest portion of the payments is generally tax-deductible in Canada. Maintaining clear records and separate accounts is key to making tax filing simpler. CRA rules can be nuanced, so we recommend that you consult a tax professional in Ontario to confirm eligibility and optimize your deductions.

Is a HELOC the Right Move for You?

While an excellent financial tool, a HELOC is most effective for seasoned investors with solid equity, stable income, and a clear plan. Using a HELOC in combination with an investment property mortgage is not a beginner’s strategy; it requires discipline and a realistic understanding of market conditions. 

Consulting an experienced mortgage broker may help you determine whether a HELOC is the right move for you, or you might benefit from a different mortgage strategy.

Final Thoughts & Next Steps

Before using HELOC to fund investment properties, take the time to evaluate your comfort with risk, your long-term goals, and the stability of your income. Next, contact an Ottawa mortgage broker. We’re ready to give you further guidance on rates, lender options, and the best way to structure your mortgage for a rental property. Get in touch today to get started!

Share this: