GTA Homeowners, Meet Your New Friend: the HESA Advantage

Posted On May 28, 2024

Did you know about this?

If you own residential property in the Greater Toronto Area (GTA), you probably have a sizeable amount of equity. Hitherto, you would be unable to access that equity without taking on a crippling high-interest debt loan, reverse mortgages or a home equity line of credit (HELOC). But now, a Home Equity Sharing Agreement (HESA) offers a reliable alternative.

The GTA is notorious for its high property rates, especially over the past decade. The median home price, an indicator of market trends, climbed to $981,500 in April 2024. However, because homeowners don’t qualify for traditional financing, many have seen their finances dwindling amid high interest rates and soaring living costs.

The HESA model addresses these affordability issues. It provides flexibility in how homeowners use their equity, whether for renovations, starting a business, paying off high-interest debt, or having extra cash for emergencies.

Introducing – The HESA

The home equity sharing agreement (HESA) has existed in the United States since 2004 as an alternative to traditional home equity financing options.

Unlike a HELOC, where the value is tied to the home’s current equity, a HESA’s value is linked to the home’s future equity.

With a HESA, eligible homeowners can receive a lump-sum cash payment of up to 17.5% of their home’s appraised value as a lump-sum payment. The first step is to appraise the property. The property value is then adjusted down by 5% to mitigate risk for the investor.

For example, if a house is appraised at $1M, the starting value is adjusted to $950,000. If a homeowner wants to access 10% of their home’s value, they will receive $100,000.

In exchange, the investor shares in the home’s future appreciation. If the home’s value decreases, the investor shares in the depreciation, reducing the amount the homeowner needs to repay.

The agreement concludes either when the homeowner sells the property or after a specified term, often up to 25 years.

The HESA model takes a comprehensive view of an applicant’s circumstances rather than relying solely on income or credit scores. The minimum entry criteria require homeowners to have at least 30% equity in their home, with other factors also considered.

Advantages of a Home Equity Sharing Agreement:

A HESA offers several advantages:

Flexible Usage: Funds can be used for various purposes, including supplementing retirement income, debt consolidation, home renovations, investments, or education expenses.

No Monthly Payments: Unlike traditional loans, there are no monthly payments or accrued interest during the term of the agreement.

Retirement Planning: This is particularly beneficial for retirees or those nearing retirement age, as it allows access to home equity without the need to sell or downsize.

Assisting with Homeownership: Shared equity arrangements can help with down payments, thus enabling potential investors to enter the housing market sooner. By increasing the down payment amount, investors can lower their monthly mortgage payments and eliminate the need for mortgage default insurance.

Access to a larger down payment also allows home buyers to consider larger or more suitable properties, such as a detached home for sale in Mississauga.

Eligibility Criteria for Home Equity Sharing Agreements:

To qualify for a HESA,

• You must be a Canadian citizen or permanent resident.
• Your home must be your primary residence.
• You must own the property, whether freehold or condominium.
• A minimum equity threshold, typically at least 25%, must be met.
• Existing mortgage or debt secured against the home should not exceed a certain percentage of its value.

How to Get a Home Equity Sharing Agreement:

Estimate: Begin by obtaining an online estimate to determine your eligibility and potential access to funds.

Application: Complete an online application providing details about yourself, your home, and any existing debts secured against the property.

Underwriting: The application undergoes underwriting, including a title search or appraisal. The applicant usually reimburses any expenses incurred during this process.

Offer Letter: Review and sign the offer letter, which summarizes the HESA terms and authorizes additional fees, such as appraisal costs.

Conditions: Fulfill all conditions outlined in the offer, including obtaining any necessary consents from existing lenders and providing documentation.

Legal Advice: Before finalizing the agreement, seek independent legal advice to ensure an understanding of the terms and implications.

Funding: After a 10-day waiting period, funds are disbursed directly into your bank account, minus the applicable fees.

Cost and Repayment Structure:

A HESA isn’t a debt product, so there are no fixed interest rates or monthly payments. Repayment consists of the original amount accessed plus or minus the investor’s share of the home’s appreciation.

Additional fees may include origination fees, closing fees, appraisal costs, and charges for discharging the agreement.

Before Signing a Shared Equity Agreement

It is crucial that you seek guidance from a qualified lawyer specializing in real estate and financial agreements before signing any SEA. A legal expert will help ensure your rights and interests are protected. In addition,

• Carefully read and understand every aspect of the SEA, including the fine print. Pay attention to the distribution of equity, potential penalties, and termination clauses. Ask questions and seek clarification on any unclear terms.
• Be vigilant in identifying hidden fees or penalties imposed by some SEA providers, such as origination fees, early termination penalties, or additional charges for specific actions. Understand these potential costs thoroughly.
• In addition to consulting with a lawyer, consider seeking independent legal advice to gain a comprehensive understanding of the SEA and its implications. Use resources like the Law Society of Ontario’s directory and referral service to find qualified legal experts.
• Different SEA providers may offer varying structures, terms, and conditions. You must be aware of any changes to the agreement and understand that what applies to one provider may not apply to another.

Homeowners also need to be aware that they may share their property’s appreciation with the investor, potentially impacting their overall wealth accumulation. They should consider additional expenses like legal, appraisal, and origination fees.

Additionally, such agreements may impose restrictions on homeowners’ flexibility, such as limitations on renting out the property or undertaking significant renovations without prior permission.

Say Hello to HESA!

Let us sum up the Home Equity Sharing Agreement.

Home equity is the market value of your stake in your home, calculated by subtracting all secured debts, such as mortgages, from the property’s market value. While accessing home equity usually involves using the property as collateral, HESA offers a different approach.

HESA allows GTA homeowners to access their home equity without traditional debt. Simply put, the process has just two payments: one upfront from the homeowner to access their equity and another at the term-end, which is the initial payment plus the provider’s share of the property’s appreciation (or minus their share of depreciation).

However, despite this arrangement, homeowners remain the sole owners of their property, as the provider is never registered on the property title. Instead, they register a charge to assert their claim to a portion of the home’s value.

FAQs about Home Equity Sharing Agreements (HESA)

What is a Home Equity Sharing Agreement (HESA)?

A HESA is a financial model that allows homeowners in the Greater Toronto Area, including Toronto, Mississauga, Brampton, Vaughan, and others, to leverage their home equity. It offers financial flexibility by providing upfront cash without monthly payments or interest for up to 10 years.

How does the HESA Model provide Financial Relief?

The HESA model offers an alternative to traditional bank lending.

Homeowners can use their equity for various purposes, such as renovations, starting a business, paying off high-interest debt, or handling emergencies. Use our mortgage calculator and cash analysis tools to help you understand how HESA can benefit you financially.

Who can Benefit from a Home Equity Sharing Agreement?

Homeowners who have seen significant property value appreciation over the years can benefit from HESA. It provides a way to access equity, meet financial needs, and create opportunities without traditional debt burdens.

What Opportunities Does HESA Offer for Senior Homeowners?

The HESA model is particularly beneficial for seniors approaching retirement age who want to unlock their home equity without selling or downsizing. It helps manage their financial obligations better and fund any home renovations to accommodate changing needs.

How does HESA Work in Practice?

With the HESA model, homeowners receive upfront cash and make a single payment at the end based on their home’s appreciation. The model is currently available in select urban and suburban areas of the GTA.

If you wish to know more about HESA or anything else related to real estate, feel free to contact us. Our team is always ready to help you.