HELOC For Consumption vs Investment

It seems every other day one can open a national newspaper these days and read about someone decrying the state of the average Canadian. The experts tell us we are so far in debt that we may never climb out and that this should be more than enough to scare us straight. It likely won’t be of course, because we are addicted to debt. “Live for the moment because you deserve it!” Isn’t that what targeted advertising campaigns preach to us endlessly? The fact is that not all debt is created equal, and I actually wish that I was 151% of my yearly income in debt, (I think I am roughly 170% in debt… but cut me some slack, I’m in my mid-twenties and own a house) as long as it was the right kind of debt.

Join The Debt Consolidation Party!

I’m constantly amazed by the social acceptance that goes along with consumer debt these days. People have taken to unlocking the equity in their house at unprecedented rates. The mechanism that allows us to do this so easily is known as a Home Equity Line of Credit or HELOC. Every big bank makes sure to feature this borrowing vehicle prominently in their ads because it is a fantastic deal for them. They get to lend money, and it is backed up by the solid value of a house; furthermore, the house is already an asset that the bank is making money on since you likely borrowed the original capital to purchase it from the very same bank. The bank made money on you paying it off the first time, and now they will make money on the same asset yet again!

HELOCs seem to be the magic elixir that is prescribed to fix all financial ills these days. Pesky credit card debt? A little HELOC for that. Stubborn car loans at a high interest rate that just won’t die. Mix a little HELOC every night before bed. It has not only become acceptable to use a HELOC to fund lifestyle inflation, it is actually routinely called “expert advice” and our nice financially-savvy term for it is “consolidating your debt at the lowest interest rate.” While this is not technically bad advice (once you have the debt, it is actually quite logical), but the fact that it is so widespread actually encourages the original sort of behaviour. Instead, maybe we should focus on not getting into that position in the first place a little more! Did you really need two new vehicles? Maybe you didn’t need that large detached house that you’re now so quick to borrow against (along with the crippling payments, and mounds of interest that went with it)?

HELOCs Aren’t For Investors You Silly Bear

Despite the “common sense advice” of using a HELOC for consumption, many people decry using a HELOC for investing as insane! “You can’t bet your house on the market!” They shout from the hilltops. Look at the last 12 years on the stock market, they hurriedly point out – anything can happen. It is utterly amazing to me that people get a free pass on using a HELOC to purchase consumer goods that will immediately depreciate in value, yet people who use a HELOC to purchase assets that have went up by an average of 10.4% over the last 250 years are insulted and ridiculed. Even if the two forms of borrowing were on financially equal footing the common social reaction wouldn’t make sense. If one were to throw in a tax deduction for investing in assets, this would tilt the scales even more right? The fact is that there is a whole financial strategy based around the idea of using a HELOC for investing called the Smith Manoeuvre.

I had intended to start the Smith Manoeuvre for a while now, but I have had to delay due to a great opportunity to expand my side business and some unforeseen expenses in helping my partner deal with the last year of her education. I am also planning on moving in the next 3-4 years, so I may actually delay the implementation of the SM until I get set up in a new location (even though it is technically possible to simply transfer your SM mortgage) just for simplicity’s sake. I do however, plan to use the Smith Manoeuvre for many decades, and build wealth with it as I am being ridiculed the whole time.

Think Critically, Not Like an “Average” Consumer

The Smith Manoeuvre is a great example of why debt numbers and statistics cannot be applied to all situations. Make sure you do your own homework and plan your own financial path and don’t just blindly except such axioms as “betting your house on the stock market is insane.” The SM might not be for everyone, but basic math shows that it isn’t insane. In fact, for many people, it makes a lot of sense. Using your debt to pay for a lifestyle you can’t afford is illogical (crazy?) under almost any circumstances however. Don’t be fooled by the banks clever offers that encourage you to tap the equity in your house instead of working hard to earn the income and/or cut the spending habits that got you in debt in the first place!

 Do you have a HELOC?  Practice the Smith Manoeuvre? If not, what do you use your HELOC for?

20 thoughts on “HELOC For Consumption vs Investment

  1. Using the SM and HELOC is definitely in our future plans. We have not yet stated due to some other factors but it is something we are working towards. If we can make our investments work for us then we will.

    I agree though, you should only do these types of things if you have the money to do so and have your debt paid off. This is not a free paycheck.

  2. I have a HELOC, which is simply a line of credit under your property equity, and it’s unused. The only reason I have it is that between a HELOC and a simple LOC, the interest rate is much better. I have prime + .5 where as the LOC is prime + 3. It’s my emergency fund if I really need it before accessing other funds dispersed around to actually make money.

    The term HELOC is often mis-represented as it is the only way to do the Smith Manoeuvre but banks also refer to HELOC as a LOC guaranteed by your property. It could be $5K or $500K depending on what you want and what you can afford. The Smith Manoeuvre requires a re-advanceable HELOC.

    The better interest rate on a HELOC would be a reason to use it for an investment loan unless you can guarantee other loans. With that, I tend to disagree that HELOC aren’t for investors, it’s just a matter of selecting the loan and interest rates at one point or another … The real question is; “Are you betting the house?”. There is nothing wrong with an investment loan as long as you can service the debt and do some decent investing.

    1. Why would you do a Smith Manoeuvre with anything but a HELOC and the accompanying low interest LOC? It wouldn’t make much sense. Doing decent investing really has nothing to do with it either, it’s more a case of simply being able to invest your money in a diverse way and not pull it out on market lows. Simple, yet deceivingly difficult for most peopel apparently. As long as you can ignore market fluctuations and stay faithful to the overall plan, you almost can’t lose in the long-term (20+ years) with the SM, or leveraged investing in general really.

  3. We don’t have a HELOC, or any type of line of credit for that matter. Besides our mortgage and each of our Mastercards, we avoid debt/open credit at all costs.

  4. i have a Heloc for 450k. my current rate is 3.25%. i used it to invest in a real estate flip that returned 20% after tax. i love tapping a heloc for a great investment. i only pay interest when i am using it, which means i have it invested in a higher returning vehicle. if i am in between deals, i let it sit there untapped and am not accumulate any interest. its having the best of both worlds.

    so it all depends. having a heloc is great. get one if you can. doesnt mean you have to use it. just good to have there for emergencies or great investment opportunities.

    1. A perfect example! Thanks for backing me up 1%. You can’t go wrong with using equity that cheaply right? When you consider your tax break on that interest, your real rate is likely somewhere around 2.5% I would imagine hey?

    1. It’s not really exposed to two markets unless your planning on selling your house. When you think about it, investing in a huge multinational company like Johnson and Johnson is really a much more diversified investment than pouring money into your house (which could substantially decrease in value with one neighbourhood-level decision). Rates are much lower than margin investing, and with the tax deductibility, I think it is a great tool that is underused.

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  10. My home has appreciated by 50% over the years. My stocks have appreciated by 3% after 20 years in the market. The house was the better investment and it’s paid for in full. I would never open a HELOC unless there was an extreme emergency.

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