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UPDATE 2-Home Capital shareholders vote against Buffett lifting stake

* 89 percent of votes cast against recommendation

* Shareholders believe extra capital not required -chair

* Board still believed proposal was in best interest (Adds comment from chairwoman)

TORONTO, Sept 12 (Reuters) - Home Capital's shareholders on Tuesday rejected a proposal for Warren Buffett's Berkshire Hathaway to raise its stake in the company, voting against the board's recommendation in a rare defeat for the U.S. billionaire.

Proxy advisory firm Institutional Shareholder Services (ISS) last month recommended shareholders vote against the proposal, which would have seen Berkshire Hathaway increase its shareholding from 20 percent to 38.4 percent.

Home Capital's Chairwoman Brenda Eprile told a special meeting of shareholders that 88.79 percent of votes cast were against the proposal with 11.21 percent in favor.

The deal would have seen Berkshire Hathaway buy new shares in the company at a price of C$10.30 per share, a deep discount to Home Capital's closing price of C$14.08 on Monday.

Berkshire did not immediately respond to a request for comment.

Home Capital and Berkshire agreed in June to a deal worth up to C$400 million ($329 million) for an initial stake of 20 percent in the business. The agreement enabled Berkshire to increase its stake subject to shareholder approval.

Buffett took his stake in the company and provided a C$2 billion credit facility after investors withdrew more than 90 percent of funds from Home Capital's high-interest savings accounts earlier this year.

The withdrawals accelerated after April 19, when the Ontario Securities Commission accused Home Capital of making misleading statements to investors about its mortgage underwriting business. Home Capital reached a settlement with the commission in June and accepted responsibility for misleading investors.

Home Capital has said the terms of the credit facility, which it doesn't currently have funds drawn down on, will remain unchanged in the event of shareholders rejecting the proposal for Buffett to increase his stake.

Home Capital's executives have emphasized the importance of having an investor of Buffett's credibility backing the company.

However, ISS said much of the benefit was already in place after the initial transaction and questioned the benefits for Home Capital's shareholders of Buffett increasing his stake.

After the result was announced, Eprile reiterated the board's belief that the deal would have been in the best interest of the company but said the vote reflected the progress the company has made in its turnaround plan.

"This decision is a clear message that the majority of our shareholders believe that Home Capital's improved deposit inflows and liquidity position diminish the need for additional capital," she said.

($1 = 1.2143 Canadian dollars) (Reporting by Matt Scuffham; Editing by Chizu Nomiyama and Nick Zieminski)