Fun fact: if you own residential real estate in the Greater Toronto Area — where home prices have surged over the past decade — you’re probably sitting on (a significant amount of) equity.
Accessing that equity without taking on high-interest debt isn't necessarily the norm, but now it’s finally possible — pragmatic, even — with a Home Equity Sharing Agreement, more colloquially known as a HESA.
The Home Equity Partners Inc. has officially debuted its HESA model in the Greater Toronto Area, providing GTA homeowners with access to an exciting new way to tap into their home’s value. The best part? It doesn't involve taking on debilitating debt.
With home equity loans and reverse mortgages pretty much the status quo in Canada, a HESA may sound newfangled, but in reality — as is explained by Shael Weinreb, CEO and Founder of The Home Equity Partners — it’s a reliable model that’s been around since ~2004 in the United States.
And for Weinreb, introducing this model to the Canadian market is personal.
“My father, who was in his early 80s and retired at the time, tried — through a bank that he had a relationship with for almost three decades — to access a small amount of the equity he had built up in his home. And the bank turned him down, simply because, on his Notice of Assessment from the previous year, he didn't have enough income, from the bank's perspective, to justify the loan,” Weinreb says.
“That got me curious about what other products are out there in the marketplace, beyond just going to a Schedule I bank, to get a home equity line of credit. I stumbled upon this concept that was being offered in the United States, and I thought it was really interesting, because they took a much more entrepreneurial and holistic view of somebody's application when deciding whether to extend cash to somebody who had built up sufficient equity in their home.”
When he says “holistic,” Weinreb means that they look at the broader picture of someone’s circumstances. The minimum entry criteria is that the homeowner must have no less than 30% equity built up in their home. There are a number of other factors that the company looks at for their assessment — “it's not necessarily one criteria that's going to make or break the application,” he explains.
The Math Behind The Model
Alicia Pedicelli, Chief Revenue Officer with The Home Equity Partners, gets into the math behind the model, explaining that the first step is to appraise the property. That established value is then adjusted down by 5%, to mitigate risk for the investor and to expedite the process of getting money in the homeowner’s hands. Homeowners can access anywhere from 5% to 17.5% of their home's appraised value.
“Say, for example, the house is appraised at $1M; we will price adjust down by 5%, putting the starting value at $950,000. But we will still invest based on the $1M,” Pedicelli says. “So if a customer wants to access 10% of their home’s value, that would be $100,000 that we would extend to them. And we would do that in exchange for plus/minus a percentage of the home's change in value since the transaction was initiated.”
If the value of the home goes down, The Home Equity Partners will also share the depreciation, Pedicelli notes. “So if we invested 10%, and the home went down by 10%, the homeowner would only need to pay back $90,000, not the full $100,000 that we initially invested.”
A few more particulars worth noting: because an investment by The Home Equity Partners is not debt, there's no expectation for repayment for up to 10 years, no monthly payments at all, and no interest owed by the homeowner during the term of the investment.
Pedicelli comes from a 20-year long career with one of the ‘Big Five’ banks, so she understands what consumers can find themselves up against, and how rigid traditional financing options can be for some.
It’s also clear to both Pedicelli and Weinreb alike that, in the context of today, a more innovative, broad-based solution to tapping into one’s home equity is necessary. Many GTA homeowners have (understandably) seen their financial situations deteriorate amid high interest rates and soaring living costs, and the HESA model is sympathetic to the fact that just because a homeowner doesn’t necessarily qualify for traditional financing, doesn’t mean they should be at a dead end.
“Right now, one of the main issues faced by a lot of Canadians is affordability," Pedicelli says. "This model will help to address the struggles that people have been dealing with, particularly over the last few years, by providing another option — beyond the traditional lending that banks provide. The model also provides flexibility with how homeowners use their equity; they may tap into it to renovate their properties, start a business, pay off high interest debt, or just have extra cash on hand for unforeseen emergencies."
“It also allows for diversification," she explains. "So rather than having a significant amount of their net worth locked into their home, they're able to take some of that money and perhaps invest in other areas, such as real estate, a diversified stock portfolio, or [the like].”
A Little Help For Aging In Place
While anyone with at least 30% equity in their home can utilize the HESA model, Pedicelli highlights that it can be an especially viable option for seniors approaching retirement age, as it allows them to unlock the equity in their homes without having to sell or downsize.
Pedicelli also points to individuals in their late 50s and 60s who might be carrying various financial obligations, including mortgage payments, credit card debt, and other expenses.
“A HESA enables these individuals to pay off debt, reduce financial stress, and regain control of their finances,” she explains.
Image via: The Home Equity Partners
“And lastly, many seniors and individuals in their late 50s and 60s may be considering home renovations to accommodate their changing needs as they age. Think: the addition of wheelchair ramps, installing grab bars, or remodeling bathrooms. A HESA can enable seniors to age in place comfortably, while maintaining independence and quality of life.”
While there’s not much to be done about the financial uncertainty and insecurity that homeowners in the GTA are grappling with, Weinreb underlines that, with a HESA, The Home Equity Partners are giving these property owners a chance to work with what they do have, and create more opportunities for themselves — with a little help, of course.
“For people that are in their 50s and 60s and may have been in their homes for the last 20 or 30 years, they've really benefited from significant appreciation,” he says. “So what we're trying to do is give them the opportunity to pull out some of that money that they've earned, on paper, to meet their financial needs.”
Visit www.theheqpartners.com to learn more.
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This article was produced in partnership with STOREYS Custom Studio.
