Easy Money? Costly Fine Print? What is the Home Equity Sharing Agreement (HESA)

Navigating the world of homeownership often feels like a balancing act, especially when unexpected expenses arise. For years, the go-to solutions have been traditional loans and lines of credit. But what happens when those options aren’t accessible? A new financial instrument is making waves in the Canadian market, and it’s called a Home Equity Sharing Agreement (HESA). While it may seem like a straightforward solution, understanding its intricate details is crucial before you dive in.

A HESA is not a loan in the traditional sense. Instead of borrowing money, you are essentially selling a piece of your home's future appreciation to a company in exchange for a lump sum of cash today. The company provides you with a portion of your home's current value—anywhere from five to 17.5 per cent—and in return, they receive a significant share of the property's appreciation when you eventually sell it. This can be a game-changer for people who are cash-strapped, have a low credit score, or are otherwise unable to qualify for a traditional mortgage or home equity line of credit. The appeal is clear: no monthly payments, no interest, and an easy approval process.

But with great flexibility comes a high potential cost. While there are no regular payments, the long-term expense can be substantial. For example, if your home appreciates by five per cent annually, the total amount you might owe the HESA provider could be equivalent to an 18.2 per cent interest rate, plus fees. This is a far cry from the rates on a conventional mortgage or even a reverse mortgage. The math becomes more favourable if home values stagnate or decline, but betting on a housing market drop is a risky strategy for most homeowners.

While HESAs are gaining momentum, they are currently only available through a few providers in limited markets like the Greater Toronto Area. This lack of widespread availability and the significant costs involved mean they are not a one-size-fits-all solution. For most homeowners, a traditional mortgage, a Home Equity Line of Credit (HELOC), or a reverse mortgage will likely be a more cost-effective choice.

How a HESA Works: A Simple Example

A Home Equity Sharing Agreement (HESA) is a financial arrangement where a homeowner receives a lump sum of cash in exchange for giving a company a share of their home’s future appreciation. It's not a loan, so there are no monthly payments or interest charges. Instead, the cost is tied to your home's value when the agreement ends.

Let's use a clear, step-by-step example to illustrate how the math works:

Initial Situation:

• Your Home's Appraised Value: $1,000,000

• HESA Amount You Receive: $100,000 (which is 10% of your home's value)

• HESA Company's Share of Appreciation: 40% (this is a common percentage for a 10% cash-out)

• Term of Agreement: 5 years

Step 1: The Initial "Cut" ✂️

When you enter the agreement, the HESA provider will often apply a risk adjustment rate to the initial appraised value. This creates a "starting value" for the HESA that is slightly lower than the full appraised value.

• Appraised Value: $1,000,000

• Risk Adjustment (e.g., 5%): $50,000

• HESA Starting Value: $950,000

This starting value is what the future appreciation will be measured against.

Step 2: The Repayment Calculation 🏠➡️💰

Now, let’s fast forward five years to the end of the agreement.

• New Appraised Value: Let's assume your home's value has increased by 25%, to $1,250,000.

• Total Appreciation: The increase in value is calculated from the initial HESA starting value of $950,000.

  • $1,250,000 (new value) - $950,000 (starting value) = $300,000 in appreciation

• HESA Company's Appreciation Share: The company now gets its 40% cut of that appreciation.

  • $300,000 (appreciation) x 40% = $120,000

• Your Total Repayment: You must pay back the original $100,000 you received plus the company's share of the appreciation.

  • $100,000 (original amount) + $120,000 (appreciation share) = $220,000

In this example, your total repayment is $220,000. This is significantly more than the initial $100,000 you received, highlighting the high cost of this type of financing when home values appreciate. While there are no monthly payments, the total lump-sum repayment can be substantial.

This is precisely why working with a professional is so important. As a mortgage agent, my role is to help you weigh all your options—not just the well-known ones. I can help you analyze the long-term costs and benefits of each financial product, ensuring you choose a solution that aligns with your financial health and future goals. A HESA may be the right fit for a select few—such as the underemployed, newly self-employed, or those who simply cannot qualify for a lower-cost alternative—but for many, a better path exists. Before you commit to a HESA, let’s have a conversation to explore all the ways you can leverage your home’s equity wisely and responsibly.