Clay raised seed funding in 2023, initially offering reverse mortgages and other housing options in the Greater Toronto Area as an alternative to the simpler (though not necessarily ideal) option of selling a property and downsizing or becoming a renter. The company plans to sell this product to owners.
What is a home equity sharing agreement?
HESA is a relatively simple concept. Today you give Clay some of your home equity in exchange for cash. Clay can get paid when he sells the home up to 25 years in the future. This means you don’t have to make any monthly payments until then.
The HESA limit is 17.5% of the home value, up to $500,000. But most homeowners can’t come close to that $500,000 cap. According to the Canadian Real Estate Association, the average home price in Canada in December 2023 was $657,145. This could potentially be a one-time cash payment of $115,000. The payments of up to $500,000 will apply to homes worth about $2.8 million.
An interesting option with HESA is that you can buy back your clay share in your home at any time after the first five years. Therefore, it is not an irrevocable decision. However, there are some costs to consider.
Before accessing HESA, your property will be independently valued to determine its fair market value. Clay then applies his 5% risk adjustment rate to determine the starting value for HESA. The homeowner must pay an establishment fee of 5% of the home’s appraised value and a closing fee of 1% of Clay’s share (or $500, whichever is greater). The homeowner must also pay the cost of the inspection, appraisal, and fees that cover the registration of a clay claim on the property.
Therefore, Clay gains the advantage of purchasing a portion of your home’s equity at a lower price, and you pay ongoing maintenance costs for 100% of the property going forward. Origination and termination fees may also be added. These nuances make HESA a good investment for Clay.
Should retirees consider HESA?
I commend Clay for his innovative approach to helping seniors access home equity in retirement. Retirees who are unable to leverage the value of their home may not have enough income to cover their expenses. Some retirees want to use their home equity as a gift to their children during their lifetime, sometimes to help them live in their own home.
An easy alternative might be to downsize or sell and become a renter. However, downsizing can be expensive when you factor in transaction costs such as real estate commissions and land transfer taxes.