Toronto-based Clay Financial has started accepting applications for a new product called a home equity sharing agreement (HESA). Launched initially for homeowners in the Greater Toronto Area, the HESA offers an alternative to reverse mortgages or selling a home to downsize or rent.
What is a home equity sharing agreement?
A home equity sharing agreement is a contract in which a homeowner sells a portion of their home’s future appreciation in exchange for a lump-sum cash payment today. Under Clay’s HESA, the company receives its return when the home is sold or at the end of the agreement term, which can extend up to 25 years. Until that time, homeowners are not required to make monthly payments to Clay.
Clay’s HESA allows the company to purchase up to 17.5% of a property’s value, with a maximum cash advance of $500,000. In practice, most homeowners will receive far less than that cap. For context, the Canadian Real Estate Association reported an average home price of $657,145 in December 2023, which would translate to an approximate lump-sum of $115,000 under a 17.5% share. The $500,000 maximum would only apply to homes valued at roughly $2.8 million.
Homeowners have the option to buy back Clay’s share after the first five years, so the arrangement is not irreversible. However, there are costs to account for. Before a HESA is finalized, the property receives an independent appraisal to establish fair market value. Clay then applies a 5% risk adjustment to set the HESA’s starting valuation.
On the homeowner side, fees include a 5% origination fee, and a closing fee equal to 1% of Clay’s share of the home’s appreciation (or $500, whichever is greater). Additional expenses commonly fall to the homeowner as well, such as appraisal and inspection costs and the fees required to register Clay’s charge on the property. In effect, Clay acquires a discounted stake in future appreciation while the homeowner continues to pay all upkeep and carrying costs for the property.
Should retirees consider a HESA?
Clay’s HESA is positioned as a tool to free up home equity for retirees who need income or wish to gift funds to family without selling the property. For many seniors, access to home equity can bridge gaps in retirement income or enable intergenerational support, such as helping adult children with down payments.
Traditional alternatives include downsizing or selling and renting, but both come with trade-offs. Selling and moving can be expensive once you factor in transaction costs like real estate commissions and land transfer taxes. Renting may reduce stability for seniors who want to remain in their homes, and not everyone is willing or able to relocate to a retirement community.
Because some homeowners value staying in their homes, solutions that unlock equity without requiring a sale are appealing. A HESA provides one such option, but it is important to weigh the fees and the fact that you give up a portion of future appreciation in exchange for immediate cash.
Alternatives to the HESA
Homeowners may also consider a home equity line of credit (HELOC) to borrow against their property. A HELOC allows for flexible borrowing, but approval depends on qualifying under standard lending criteria, which can be difficult for retirees with limited documented income.
Reverse mortgages are another option and typically allow access to a larger share of home value—often up to 55%—compared with a HESA’s smaller equity share. However, reverse mortgages are debt instruments that accrue interest at rates that are commonly higher than conventional mortgages or HELOCs. Like a HESA, repayment typically occurs when the home is sold, deferred to the future, which shifts the cost to that later date.
Reverse mortgage or HESA: Which is better?
Choosing between a HESA and a reverse mortgage depends on personal circumstances and expectations for future home price growth. With a HESA, you trade a portion of future appreciation—sold to a company at a discounted starting valuation—in exchange for no monthly payments and no interest charges. With a reverse mortgage, you borrow against the property and accumulate interest over time, increasing the debt owed at sale.
If you expect modest home price growth over the next decade, the HESA model may be more attractive because the homeowner’s eventual payout to the investor depends on appreciation. Conversely, if you need to maximize immediate access to equity and accept accumulating interest, a reverse mortgage will typically offer a higher initial borrowing amount. Neither option should replace a thorough review of other choices, such as using savings, liquidating investments, a HELOC, reducing expenses, taking on part-time work, or renting out a room.
What is the best approach to home equity in retirement?
There is no single “best” approach to using home equity in retirement. Financial priorities and family dynamics differ: some retirees want to preserve property value for heirs, while others prefer to use home equity to improve quality of life or support family members now.
Ultimately, the right decision is personal. Home equity products like the HESA expand the range of options available, and growing competition among providers may lower costs over time. Still, homeowners should carefully compare fees, long-term costs, and implications for heirs before choosing any product that monetizes home equity.
Read more from Jason Heath:
- Should Canadians keep their investment accounts when retiring abroad?
- How to divide the assets of an estate between beneficiaries
- Renting vs. owning: Can you be financially secure without buying a home?
- Should retirees pay off their mortgages with investments?
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