Last updated on May 15th, 2022 at 09:28 pm
At the start of this year, I made a New Year’s resolution to get a HELOC and use it to invest. My goal is to continue my strategy of using cheap leverage to build wealth and achieve financial independence.
I started on this journey last summer when I took advantage of a too-good-to-be-true personal line of credit from Tangerine and combined that with the amazingly low margin rates at Interactive Brokers (referral link).
I used dollar-cost averaging over a period of 5 months to build a $40,000 position in VEQT (Vanguard All-Equity ETF Portfolio). Today my position in VEQT stands at just over $42,000, and it costs me about 2.45% in interest per year, or about 1.5% after the tax deduction. Edit: Okay, now it costs a bit more!
Enter the Smith Maneuver
For those of you not familiar, the Smith Maneuver is a popular but infrequently spoken about (at least outside personal finance circles) strategy to use the equity in your home for investing. I’ll save an in-depth explanation for a future article, but at its core, the strategy is to get a re-advanceable mortgage and use the HELOC portion for investing.
You benefit by earning capital appreciation and dividends from your investments. Meanwhile, the interest you pay on your HELOC is tax-deductible, as long as you only use it for investing and not for any other purpose (like buying a new car).
Luckily for me, I have my mortgage with TD, and they have an excellent re-advanceable mortgage product called the Home Equity Flexline that I could easily add to my mortgage.
Getting an Appraisal
To get a Home Equity Flexline, I had to contact a mortgage specialist at TD who was able to start my application. This involved sharing all of my wife and I’s financials, including our salary, record of employment, and investment assets.
It also involved getting a home appraisal from one of TD’s appraisers. The process was pretty simple: the appraiser came by and spent 15 minutes taking pictures of our home. Within five days, the appraisal report was shared with our contact at TD, who invited us into a branch to continue the process.
The appraisal cost $300, which would later be reimbursed by TD. The only other cost was the lawyer fees: $600 for the lawyer to spend 20 minutes getting us to sign a few forms and to check our ID.
Receiving a Good Rate
By this time in the process, we already knew the rate we qualified for: TD Prime + 0.30%. As of writing, the TD Prime rate they use for their HELOC was 2.70%, meaning our overall rate was 3.00%.
I was aiming for TD Prime + 0.20%, but I wasn’t in the mood to argue after hearing that our appraisal came in at $1,450,000—far higher than I expected, considering we just bought this home for $850k less than three years ago.
Those of you familiar with my blog may remember my post on Hitting the Real Estate Jackpot, where I shared we earned paper gains of 175% on the purchase of our home. It seems I may need to revise those numbers, which assumed our home to be worth just under $1.2M.
As a result of this huge appraisal, we qualified for a HELOC of $400k. Exactly one business day after signing our paperwork with the lawyer, the HELOC was made available in our TD online banking. All in all, the process took about three weeks from start to finish.
The next step on this journey is to finalize our investment strategy and ensure we have a solid grasp of the mechanics of executing the Smith Maneuver (it’s a bit trickier than I’ve outlined here). Hopefully, you’ll follow along as we start this new investing journey.
Do drop a comment if you have any questions, comments, or words of caution on the Smith Maneuver!
Thanks for Reading
I recently wrote a few articles that you may be interested in. This includes my post on Canada’s housing market in 2022 and my post on the 10 best Canadian dividend stocks. Consider giving those a read if you think they’ll help you on your financial journey!
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