HELOC leverage (Smith Manoeuvre)

What this is

Should you borrow against your home to invest?

In Canada, interest on money borrowed to earn investment income is tax-deductible (the 'Smith Manoeuvre'). If the after-tax investment return beats the after-tax HELOC interest, you make money. If not, you lose.

• ·After-tax HELOC cost = HELOC rate × (1 − marginal tax rate). At 7.5% × (1 − 0.43) = 4.28%.
• ·After-tax investment return = expected return × (1 − dividend/cap-gains tax drag). Roughly 5-6% net for a balanced portfolio.
• ·Profitable margin is usually thin. Add volatility — a 30% market drop with leveraged money is brutal.