Should retirees consider a home equity sharing agreement (HESA)?

Clay raised seed funding in 2023 and is initially launching the product to home owners in the Greater Toronto Area as an alternative to reverse mortgages and the simple—although not always ideal—option of selling a property to downsize or become renters.

What is a home equity sharing agreement?

The HESA is a relatively straightforward concept. You give some of your home equity to Clay in exchange for cash today. Clay will get paid when you sell your home in the future, up to 25 years down the road, meaning you don’t need to make monthly payments in the meantime.

The limit for a HESA is up to 17.5% of your home’s value, up to $500,000. However, most home owners will get nowhere near that $500,000 limit. The average Canadian home price in December 2023 was $657,145, according to the Canadian Real Estate Association. That would translate to a potential lump sum cash payment of $115,000. The maximum payment of $500,000 would apply to homes valued at around $2.8 million.

An interesting option with the HESA is that you can buy back Clay’s share of your home anytime after the first five years. So, it’s not an irreversible decision. But there are a few costs to consider.

Before you can access a HESA, your property is independently appraised to determine its fair market value. Clay will then apply a risk adjustment rate of 5% to determine its starting value for the HESA. Home owners must cover a 5% origination fee and a closing fee of 1% of Clay’s share of your home appreciation (or $500, whichever is greater). The home owner must also pay the cost of inspections, appraisals and fees to cover the registration of Clay’s charge on the property.

So, Clay gets a good deal on purchasing some of your home’s equity at a lower price, and you pay the ongoing maintenance costs for 100% of the property going forward. The origination and closing fees can also add up. These nuances help make the HESA a good investment for Clay.

Should retirees consider a HESA?

I give Clay credit for its innovative approach to helping seniors access their home equity in retirement. Retirees who can’t tap into their home’s value may not have sufficient income to cover their expenses. Some retirees want to use home equity for gifting to their children during their lives, sometimes to help them get into homes of their own.

A simple alternative may be to downsize or to sell and become a renter. But downsizing can be costly when you consider the transaction costs, including real estate commissions and land transfer tax.

Renting can be less secure than owning, especially for seniors who are not inclined to move into a retirement home. More importantly, some seniors prefer to stay put in their home. So, the fact is that some home owners may need to access home equity in retirement without selling. The option of simply saving more sounds easy enough in a perfect world, but in reality, that does not always happen.

Alternatives to the HESA

You may be able to borrow against your home’s value using a home equity line of credit (HELOC). But access to credit can be limited for a retiree, considering you need to qualify based on the same lending criteria as any other borrower. The lender will determine how much it is willing to lend you based on your income.

A reverse mortgage is another option. It allows a borrower to access up to 55% of their home’s value. This means a reverse mortgage allows more access to home equity than a HESA by a long shot. But a reverse mortgage is a debt that accumulates interest at a rate that tends to be higher than a conventional mortgage or HELOC. Like the HESA, payments are not required until the home is sold, so the cost is deferred to the future.

Reverse mortgage or HESA: Which is better?

Strategically speaking, someone looking to use either a reverse mortgage or a HESA should consider which might cost more in the long run. In other words, will it be costlier to give up a percentage of your home’s appreciation (sold to a company at a discount) or to owe future interest?

Someone who feels real estate prices are unlikely to rise as much over the next 10 years as they have in the past 10 years may be more inclined to consider a HESA. Someone who wants to access as much of their home equity as possible might consider a reverse mortgage. But neither should come before considering other options like accessing savings, investments or a HELOC, or reducing spending, getting a part-time job, or renting out a room in the home, for example.

What is the best approach to home equity in retirement?

I struggle with the best approach in retirement. Some contend that a retiree should be careful about spending their home equity. Others feel that leaving a million-dollar real estate inheritance means the person worked too long or spent too little in retirement. Or that a parent could have made better use of their home equity to help their children when they needed it most.

In my opinion, finance is personal, and people need to consider the options available and decide for themselves. As the supply of home equity products increases, competition may help make the options cheaper for consumers, as well. Although home owners have options, they can be costly.

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?
• Mortgage renewal calculator

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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