What Is A Home Equity Sharing Agreement?

A HESA differs from other home equity financing options, such as a home equity line of credit (HELOC), because its value is tied to your home’s equity in the future, rather than today. Since a home equity agreement is not a loan, there are also no monthly payments or accrued interest.

With a HESA from Clay Financial, eligible homeowners can receive up to 17.5% of their home’s value, to a maximum of $500,000, as a tax-free, lump-sum cash payment. In exchange, Clay Financial shares a percentage of your home’s future appreciation. The HESA ends when you sell your home or buy back the interest after the first five years. The maximum term for a HESA is 25 years.

Steps To Get a Home Equity Sharing Agreement

1. Get an estimate online. This will tell you if you’re eligible for a HESA and how much you may be able to access.
2. Submit an application. You and any co-owners will complete an online application where you’ll provide information about yourself, your home and any debt secured against your home. Clay Financial will initiate underwriting the application and any expenses incurred during the process (such as a title search) are to be reimbursed by the applicant, up to a $100 limit.
3. Sign the offer letter. The offer letter contains a summary of the terms of the HESA, as well as an authorization for additional fees, such as an appraisal and possibly a home inspection.
4. Satisfy all conditions. Once you have signed, Clay Financial will arrange for an appraisal. If you have a mortgage, you may need your lender’s consent for the HESA, as Clay Financial will register a charge on the home’s title to indicate the company has an interest in the appreciated value of the home.
5. Sign your HESA. Once all offer conditions have been met, you can review and sign your HESA documents. Clay Financial requires that you provide them with a certificate of independent legal advice confirming you reviewed the HESA documents with a lawyer before signing.

Clay Financial will fund the HESA at the end of a 10-day waiting period. You can cancel during this time without penalty, but you will be responsible for paying any authorized expenses incurred, such as a home appraisal.

You’ll receive your HESA funds in your bank account on the first business day after the 10-day waiting period ends. The amount you receive is the HESA amount, less Clay Financial’s origination fee (5% of the equity being accessed) and any expenses you agreed to pay.

Who Is Eligible for a Home Equity Sharing Agreement?

Currently, Clay Financial is only offering its HESA in “select urban and suburban areas of the Greater Toronto Area (GTA),” which includes Toronto, Mississauga, Brampton, Vaughan, Newmarket, Aurora, Richmond Hill, Markham, Pickering, Ajax, Whitby, Oshawa, Oakville and Burlington. (You can use your postal code to determine if you are eligible and, if not, you can join a waitlist and be notified when the HESA offer expands.)

“Expanding into other communities around the GTA is a natural next step for us and then expansion into other provinces will follow,” says Henderson. “While we don’t currently have fixed dates for those expansions, we’ll be making those decisions based on both homeowner demand (e.g., our waitlist) and HESA investors’ interest in specific markets.”

In addition, to be eligible for a HESA the following must be true:

• You’re a Canadian citizen or permanent resident
• Your home is your principal residence
• You own your home (freehold or condominium)
• You have at least 25% equity in your home
• If you have a mortgage or HELOC, that debt is less than 75% of your home’s value

Documents Needed To Apply for a Home Equity Sharing Agreement

You need to provide the following documents when applying for a HESA:

• Government-issued ID (from all homeowners) that is compared to a selfie that you provide during the application process
• Proof of income (from all homeowners), preferably a Proof of Income Statement that you can download from the Canada Revenue Agency, although you can also provide your most recent Notice of Assessment, a recent pay stub or a letter from your employer confirming the details of your employment (including salary)
• Your most recent property tax bill
• Your most recent electricity, water and natural gas (if applicable) bill
• Your most recent statements for any secured debts such as a mortgage, HELOC, home equity loan, etc. You do not need to provide statements for unsecured debt from a credit card, investment accounts or transactional bank accounts

Why Get a Home Equity Sharing Agreement?

“Many of the homeowners that we are working with already are fully or partially retired and want to supplement their retirement income, finance home improvements or invest in their side business now that they no longer have their historical income,” says Henderson. “Others are younger and considering using a HESA to eliminate their high-interest debts and improve their credit score or finance sustainable home upgrades like installing solar panels.”

He adds, “Generally, they are all people who love their homes and want to access some of the equity they’ve built up but don’t want to—or can’t—take on more debt.”

There are no restrictions on how you use the funds from a HESA. Possibilities include:

• Supplement your retirement income with tax-free HESA funds
• Pay off debt, allowing you to reduce your monthly payments and improve your credit score
• Renovate your home
• Diversify your wealth with investments
• Fund an education for yourself or a family member
• Start a business
• Buy a second home or recreational property
• Give a living inheritance (to help a family member with a down payment on a house, for example)

A HESA isn’t a debt product, so there is no interest rate or payments. Instead, Clay Financial positions itself as a home equity partner, rather than a lender.

The amount you repay at the end of the HESA is equal to the original amount, plus or minus Clay Financial’s share in the change of value in your home, which equals four times the percentage of your home’s value being accessed for the HESA.

For example, if you access 10% of the value of your home, you’ll repay 40% of the appreciated value. If your home depreciates in value, you may repay less than you originally accessed.

Using the example of a home valued at $950,000, if you access $100,000 in equity from your home, or a bit over 10%, and your home is valued at $1.15 million at the time you repay the HESA in four years, you’ll need to pay back the original $100,000, plus approximately $80,000 ((4 x 10%) x (1,150,000 – 950,000)), for a total of $180,000.

In comparison, a $100,000 home equity line of credit, or HELOC, with a four-year term and 7.2% interest rate would cost you approximately $2,400 in monthly payments. At the end of the four years, you will have paid $115,392, and almost $15,400 in interest. However, you will keep the entire appreciated value when you sell your home.

Because the appreciation of a home is unknown, it’s impossible to know how much you’ll end up repaying, but here are examples of three scenarios provided by Clay Financial. The starting value of the home is $950,000 compared to the appraised value of $1 million as Clay Financial applies a risk adjustment rate of typically 5% to the appraised value to account for “the inherent uncertainty in any valuation and the fact that the house is not actually being sold”:

Forbes Advisor then calculated the percentage change from the HESA gross amount and the repayment amount for the three scenarios:

Additional fees include:

• An origination fee equal to 5% of the equity being accessed at the start of the HESA, which is deducted from the HESA amount
• A closing fee equal to 1% of Clay Financial’s share in the home’s appreciation, or $500, whichever is greater
• An independent appraisal of the home (ranges between $350 and $700)
• The cost to discharge Clay Financial’s charge from the property (up to $400)

How Do I Pay Off My Home Equity Sharing Agreement?

Clay Financial’s HESA has an open 25-year term, which means you can end it and pay back the funds anytime without penalty. These events also trigger the end of your HESA:

• When you sell your home
• If you buy out Clay Financial’s interest (only available after the first five years of the HESA)
• If all homeowners die
• At the end of 25 years

Clay Financial also states that it will not share in any home depreciation if you end the HESA within the first five years or if you buy out their interest.

“When we looked around at the existing options for accessing that equity [in a home] (take on debt or sell), we felt an alternative was missing,” says Henderson.

“For some homeowners, taking on more debt simply isn’t an option. They may not qualify for certain debt products because their income is lower in retirement or they’re maxed out and can’t carry any more debt. Some debt products, like reverse mortgages, may not be available to them because of age restrictions or, even if they are old enough, they may not be able to access enough equity or even qualify…Other homeowners… don’t want the monthly payment obligation or to be taking on the risk of fluctuating interest rates. In the case of no-payment mortgages and reverse mortgages, they’re concerned that compounding interest could erode most or all of their home equity over time.”

Here’s how a HESA compares to other financing options currently available:

HESA vs a HELOC

With a HELOC you can borrow up to 65% of your home’s appraised value in a revolving loan that is either tied to your mortgage or a standalone product. Your interest rate is variable, typically prime plus a premium of between 0.5% and 2%. You only need to make monthly interest payments, and typically your HELOC remains open until you sell your home or choose to repay the balance in full. You’ll need to provide proof of sufficient income and have a manageable debt-to-income ratio.

HESA vs a Reverse Mortgage

If you’re 55 or older, a reverse mortgage allows you to borrow a percentage of the current value of your home to get tax-free cash. You don’t make monthly loan payments, but repay the loan (plus accrued interest) when you sell your house. It can have a fixed rate or variable rate. There is no minimum income requirement.

HESA vs Home Equity Loan

A home equity loan is a fixed-rate loan where you receive a lump sum of cash that you repay in installments of principal and interest. Your interest rate, which may be fixed or variable, is typically higher because a second mortgage is considered a higher risk. You’ll need a strong credit score and sufficient income to qualify.

HESA vs Mortgage Refinance

When you refinance your home, you’re replacing an existing mortgage with a new one, up to 80% of the home’s value. A refinance is a way to access existing equity in your home without selling. You can access up to 80% of your home’s current value, less your outstanding mortgage. This difference can be paid out in cash, and then you are responsible for making mortgage payments on the total loan amount. You’ll need a strong credit score, sufficient income and a manageable debt-to-income ratio.

Here is a breakdown of the main differences between a HESA and these conventional loan products:

Pros

• You can access the equity in your home without selling
• You receive a lump sum of tax-free cash upfront
• There are no monthly payments and you pay only at the end of your HESA
• You’re not vulnerable to rising interest rates
• The current equity in your home does not erode due to accruing interest
• There is no minimum income requirement for a HESA
• The open term means you can end your HESA at any time without penalty, up to 25 years
• If your home depreciates in value, your repayment could be less than the original payment you were given
• The application process is completely online
• Unsecured debt, such as credit card balances, is not considered in your application

Cons

• You won’t know how much you need to repay as it’s tied to the appreciation of your home
• If your home has a significant appreciation in value, your repayment will be significantly higher compared to a conventional loan
• The HESA is currently only available in the GTA
• The maximum amount you can currently access is 17.5% of the value of your home, or $500,000
• Significant fees are associated with the HESA, including origination, closing, appraisal and legal costs

If you’re a debt-averse homeowner, a HESA may be an option if you’re looking to access the equity in your home without selling. “Ultimately, the need we’re meeting is one of financial flexibility,” says Henderson.

However, it’s important to understand the tradeoff with a HESA; no monthly payments or accrued interest in exchange for a share in the future value of your home.