Amid fluctuating mortgage rates and inflationary pressures of recent years, owning a home in the GTA can sometimes feel like an uphill battle.
However, one significant advantage remains: the ability to tap into your home’s equity.
Whether you're looking to invest in more real estate, assist a family member, pay off high-interest debt, or renovate your home, there are several ways to leverage this valuable asset. Among the options is a relatively new model available to Greater Toronto Area homeowners: the Home Equity Sharing Agreement (HESA).
The debut of a HESA in the GTA is timely, no doubt, given that homeowners sometimes find themselves house-rich but, frustratingly, cash-poor.
Beyond HESAs, Canadian homeowners have Home Equity Lines of Credit (HELOCs) and reverse mortgages available to them. But these options aren’t one-size-fits-all. As such, it’s critical to understand what exactly these different ways to access your home’s equity are, and what they involve for the homeowner.
Understanding Your Options
Home Equity Line of Credit (HELOC)
A HELOC is one of the most common methods for accessing home equity. This form of revolving credit allows you to borrow money, repay it, and borrow again, up to a certain limit. The credit limit on a HELOC is 65% of your home’s purchase price or market value or, when combined with a mortgage, can be up to 80%.
“It works as a loan,” says Shael Weinreb, CEO and Founder of The Home Equity Partners. Homeowners must qualify based on several variables, including credit score, income, and existing debt levels. Monthly interest payments are required, which can be a burden for those with limited disposable income.
Alicia Pedicelli, Chief Revenue Officer at The Home Equity Partners, cautions that a HELOC uses a variable interest rate, so it can fluctuate heavily, the borrower’s home serves as collateral and — like a credit card — large balances can be incurred quickly.
Reverse Mortgage
A reverse mortgage allows homeowners aged 55 or older to borrow up to 55% of their home’s value, provided the property is their primary residence. One advantage of a reverse mortgage is that it doesn't require monthly payments. Instead, the loan amount, along with accrued interest, is repaid when the homeowner sells the home, moves out permanently, or passes away.
Pedicelli notes that while reverse mortgages do offer flexibility, they also erode home equity over time.
Further, Weinreb explains that “Interest costs accrue over the lifetime of the loan, meaning the amount owed builds over time." This can significantly reduce the homeowner's equity, leaving less for their heirs.
Moreover, if there’s an existing mortgage, the reverse mortgage lender will pay it off and become the primary mortgage provider — often at a higher interest rate, and with substantial fees.
Home Equity Sharing Agreement (HESA)
Introduced recently to the GTA, the Home Equity Sharing Agreement (HESA) model offers a novel approach to accessing home equity. This model, flourishing in the US since the early 2000s, allows homeowners to access 5% to 17.5% of their home's appraised value without incurring high-interest debt or monthly payments.
In May, The Home Equity Partners launched their HESA model in the GTA. Unlike HELOCs and reverse mortgages, qualifying for a HESA is relatively straightforward. Weinreb says that The Home Equity Partners adopt a holistic approach when assessing applications, considering factors beyond just credit scores.
With a HESA, there is no expectation of repayment for up to 10 years, and homeowners do not owe any interest during this period. “We don't touch any of your existing equity; that’s all yours. We focus on future appreciation, if any, in your home, and we participate in that instead," Weinreb says.
However, homeowners must have at least 30% equity in their home, and they can only access between 5% and 17.5% of the home's appraised value, which is less than what's available via a reverse mortgage.
READ: Newly Launched Financing Model Makes It Easier To Access Your Home Equity
Getting Personal: Which Option Will Work For You?
Determining the best option for your needs depends on your financial situation, and your future plans.
A HESA can be particularly beneficial for seniors approaching retirement, who wish to unlock their home equity without selling or downsizing. It’s also a valuable solution for those facing unexpected health issues, allowing them to access funds without monthly repayment burdens.
Pedicelli advises that homeowners consider how long they plan to stay in their homes before committing to a HESA. “Our term is 10 years, and they can exit at any time. However, if they exit within the first three years and their home has decreased in value, we do not share in the depreciation,” she explains.
Image: The Home Equity Partners
For those needing financial flexibility while protecting their home equity, a HESA can be an excellent choice. To learn more about whether a HESA is right for you, visit The Home Equity Partners.
Visit www.theheqpartners.com to learn more.
This article was produced in partnership with STOREYS Custom Studio.
