For many Canadian homeowners, their most valuable asset is their home. However, accessing that value often means taking on more debt through traditional loans, complete with monthly payments and interest charges. The Home Equity Partners (HEQ), a Toronto-based real estate investment company, offers an alternative: the Home Equity Sharing Agreement (HESA). Let’s explore the ups and downs of this innovative approach.
What is a Home Equity Sharing Agreement (HESA)?
The HESA allows homeowners to convert a portion of their home’s equity into cash without incurring new debt, monthly payments, or interest charges. In exchange for an upfront cash payment (the Initial Payment ), HEQ receives a share in the future change in value of the home. This means if the home’s value goes up, HEQ shares in the appreciation; if it goes down, they also share in the depreciation, aiming for a partnership approach.
Homeowners are not required to make any payments to HEQ until they decide to sell their home, exit the HESA, or after 10 years, whichever comes first. The amount owed at settlement is based on the Initial Payment plus or minus a percentage of the home’s appreciation or depreciation.
The “Goods” (Pros) of the HESA:
Financial Flexibility with No Monthly Payments: A significant advantage of the HESA is the absence of monthly payments or interest charges. This provides homeowners with immediate cash and substantial financial flexibility, allowing them to use the funds for renovations, paying off high-interest debt, or other life goals without the burden of a new recurring expense.
Protection of Existing Equity: The homeowner’s existing equity and any future equity built from paying down their mortgage is protected with the HESA. HEQ only shares in the future change in value of the home.
Partnership Approach: HEQ emphasizes a collaborative partnership, built on honesty, integrity, and transparency. They share the risk of a home’s value decreasing proportionately if the Investment Percentage is 10%, they share 10% of the decrease.
Flexible Qualification Criteria: To be eligible for the HESA, homeowners must own and live in their home and have built up at least 30% equity. The home must be a freehold townhome or a single-family home (condo owners do not qualify) in the Greater Toronto Area. A minimum Credit Score of 500 is required.
Renovation Adjustment Benefit: If homeowners make qualifying renovations that increase their home’s value, a Renovation Adjustment can be applied. This ensures that the homeowner can recoup any investments made in enhancing the property, as HEQ does not share in the value added by these improvements. Renovations must collectively add a minimum of $25,000 in value to qualify.
Clear Disclosures and Annual Updates: All terms are clearly disclosed in writing prior to the execution of an agreement. HEQ provides homeowners with an annual update on their home’s estimated current market value and the amount they would owe if they were to sell or complete a Homeowner Buyout at that time, upholding transparency.
The “Bads” (Cons/Things to Consider) of the HESA:
Risk Adjustment to Value: A 5.0% Risk Adjustment downwards is applied to the Appraised Home Value at the time of origination to establish the Starting Agreed Value (SAV). This means the baseline for calculating shared appreciation is effectively 5% lower than the initial appraisal, which could impact HEQ’s profit share.
Upfront Fees and Costs: Homeowners incur a one-time transaction fee of 3.9% of the Initial Payment, which is deducted from the Initial Payment received. Additionally, homeowners are responsible for third-party costs, including appraisal, inspection (if applicable), and settlement fees (such as title search and security registration), also deducted from the Initial Payment.
Restriction Period on Loss Sharing: During the first three years of the HESA, known as the Restriction Period, HEQ will not share in any loss if the home’s value decreases. This means if a homeowner sells within this period, the Ending Agreed Value will be at least equal to the initial Appraised Home Value, even if the market value has declined. Consequently, homeowners would need to repay at least the Initial Payment plus any amounts attributed to the Risk Adjustment. This could be 20% or more than the Initial Payment received.
Home Finance Cap: The HESA includes a Home Finance Cap, which limits the total amount of financing secured by the home to 75% of its Appraised Home Value. This includes outstanding mortgage loan balances, any available but undrawn credit lines secured by the home, and the Investment Percentage. This could potentially restrict a homeowner’s ability to take on additional secured debt.
No Loss Sharing in Homeowner Buyout: When a homeowner chooses a Homeowner Buyout (ending the HESA without selling the home), HEQ does not share in any loss if the home’s value has decreased since the start of the HESA. In this scenario, the Ending Agreed Value will be at least equal to the initial Appraised Home Value, requiring the homeowner to repay the Initial Payment plus any amounts attributed to the Risk Adjustment, regardless of market decline.
Requirement to Maintain Property: Homeowners are required to maintain their home in good condition, allowing for ordinary wear and tear. If the home is not properly maintained, a Maintenance Adjustment may be applied, increasing the Ending Agreed Value to ensure HEQ does not share in losses due to poor upkeep.
Subordinate Financing Implications: The HESA is considered subordinate financing to any existing or new mortgages. Some mortgage lenders may be unwilling to offer new loans due to the presence of this subordinate financing.
The Home Equity Partners provides a distinct option for Canadian homeowners in the GTA seeking to unlock their home’s equity without the constraints of traditional debt financing. It’s designed for those looking for a long-term solution that empowers financial freedom while allowing them to stay in their homes. As with any financial product, potential users should carefully weigh these pros and cons and consult with financial, tax, and legal advisors.