Despite recent interest rate cuts from the Bank of Canada, many Canadians are in for a shock when their mortgages come up for renewal in the years ahead.
Some 76% of mortgages that were outstanding as of February 2024 are facing renewal by the end of 2026, according to the Office of the Superintendent of Financial Institutions, the country’s banking watchdog. A significant number of these loans were obtained several years ago with rock-bottom rates, fuelling the risk of more widespread mortgage defaults if homeowners can’t shoulder higher monthly payments upon renewal, OFSI warns.
Of course, droves of Canadians are already feeling the pinch today.
“People are getting desperate," says Alicia Pedicelli, Chief Revenue Officer at The Home Equity Partners. "People are renting out rooms in their home and trying to come up with all types of solutions to stay in their homes."
Unfortunately, the most common solutions have serious drawbacks, whether through losing personal space and taking on the added hassle of being a landlord, or, worse yet, by accumulating even more debt.
However, with The Home Equity Partners’ recent introduction of the Home Equity Sharing Agreement (HESA) to the Greater Toronto Area, potentially distressed borrowers have a new solution — one that sidesteps many pitfalls.
“We can really help people,” says Shael Weinreb, CEO and Founder of The Home Equity Partners.
Image via: The Home Equity Partners
READ: Newly Launched Financing Model Makes It Easier To Access Your Home Equity
How HESAs Work
Think of a HESA as a profit-sharing partnership. The Home Equity Partners will provide homeowners anywhere from 5% to 17.5% of the current value of their home, in exchange for a stake in the property’s future appreciation. That share is four times the percentage of the initial investment. So if, for example, a homeowner obtains 5% of their property’s value, they agree to share 20% of the increase in value over the course of the partnership.
“A HESA offers homeowners the opportunity to convert a portion of their existing home equity into liquid cash,” says Jimmy Suske, Vice President, Investments, at The Home Equity Partners. “These funds can be strategically reserved to mitigate potential cash flow challenges that may arise due to increasing mortgage payments in a higher interest rate environment.”
Image via: The Home Equity Partners
Homeowners — who must have at least 30% built up in equity to participate — aren’t required to pay back the initial investment until they sell the home or 10 years pass, whichever comes first. (If the home value doesn’t rise, the homeowner only returns the initial investment, and if it drops, a percentage of the decline is subtracted from the outstanding amount.)
But a HESA does more than buy a homeowner time. Here are three other major advantages of HESAs for mortgage borrowers who are worried about an impending interest-rate shock.
3 Ways A HESA Helps With Higher Mortgage Payments
1. HESAs Don’t Add To Your Debt
Homeowners who are struggling to make their mortgage payments may be tempted to try band-aid solutions, such as taking out a line of credit. Or they might consider extending their amortizations. But in all these cases, homeowners get dinged with more debt, notes Suske.
“Extending amortization can reduce monthly payments, but it also lengthens the repayment period and increases the total interest paid over the life of the mortgage,” Suske points out. “A HESA, on the other hand, provides immediate access to funds without increasing the homeowner's debt load, as there are no additional interest charges or extended repayment terms involved.”
2. HESAs Maintain Your Home’s Equity
Some distressed homeowners, particularly those aged 55 and older, take out a reverse mortgage to access cash. But any amount of money that homeowners obtain is taken directly out of the equity they’ve worked so hard to build up (learn more about the differences between HESAs and other alternatives here). That’s not the case with a HESA. “Our product doesn’t erode any equity in your house,” explains Weinreb.
READ: HELOCs, Reverse Mortgages, and HESAs: Which Is Right For You?
3. HESAs Are Flexible and Accessible
Unlike a mortgage with a big bank, homeowners aren’t penalized for paying back the initial investment early. “There aren’t any handcuffs on you,” says Weinreb. “We’re really meant to be a tool to provide some relief to a family when they need it.” Not only that, but The Home Equity Partners take a more “holistic” approach to the application process than a major lender does for a loan. They’ll look beyond your employment status, for example, often a barrier for self-employed or retired individuals looking to access credit.
While a HESA can keep mortgage borrowers from falling behind on payments, it has many other potential uses. For instance, a HESA can be leveraged to fund retirement, renovations, or any number of unexpected expenses. It could even be used to help a younger relative step onto the property ladder with the gift or loan of a down payment.
Image via: The Home Equity Partners
“This approach not only supports the next generation in achieving homeownership, but also fosters financial security and stability within the family,” says Suske.
Indeed, there are many avenues by which a HESA can support homeowners in the years to come. To learn more about whether this option is right for you, visit The Home Equity Partners.
Visit www.theheqpartners.com to learn more.
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This article was produced in partnership with STOREYS Custom Studio.
