HELOCs & readvanceable mortgages

A home equity line of credit (HELOC) is a revolving loan secured against your house: you're given a credit limit, you draw what you want, and you pay interest only on the balance you've used. It works like a giant credit card at a much lower rate, but that rate is variable, tied to your lender's prime rate, so it moves whenever the Bank of Canada moves. In Canada a standalone HELOC is capped at 65% of your home's value. A readvanceable mortgage combines a regular mortgage and a HELOC in one product (BMO calls it a Homeowner ReadiLine, National Bank the All-in-One, and Scotiabank the STEP): as you repay principal on the mortgage side, room opens up on the revolving credit line, so you can re-borrow what you've paid off. The two portions together can go up to 80% of your home's value, but the revolving line itself can never exceed the 65% ceiling. Since a 2023 tightening by the banking regulator (OSFI), any borrowing between 65% and 80% has to sit in a regular amortizing term portion that pays down and does not readvance, so the automatic "pay down, re-borrow" cycle only runs on the revolving piece up to 65%.

The Smith Manoeuvre is a strategy built specifically on a readvanceable mortgage. In Canada, interest on money borrowed to buy investments that can produce income is tax-deductible, while interest on your regular mortgage is not. The idea: as you pay down your mortgage, you immediately re-borrow that freed-up room from the HELOC portion and invest it, then use the tax refund and investment income to pay the mortgage down faster, converting non-deductible mortgage debt into deductible investment debt over time. It's legal and the Canada Revenue Agency has recognized the underlying interest-deductibility rules for decades.

Here's the part the strategy's promoters gloss over: you are borrowing against your home to buy investments, on a variable rate, and keeping your total debt roughly constant for years instead of paying the house off. If your investments fall while rates rise, you owe more interest on a portfolio worth less, with your home as collateral. The tax deduction is real but it's a rebate on interest you're choosing to pay, not free money. Leverage cuts both ways, and putting your primary residence behind a stock portfolio is a materially different risk than a plain mortgage.

Two practical notes on HELOCs generally. First, the interest-only minimum payment is a trap for cash-flow management: you can carry a balance for years touching none of the principal, so a HELOC can quietly become permanent debt. Second, most are demand facilities, meaning the lender can technically call the loan or freeze your available room, and they can reduce your limit if your home's assessed value drops. That flexibility is real, but it belongs to the bank as much as to you.