A new platform could make investing in Canada’s most expensive real estate market less daunting.
Vancouver-based Fraction is an equity stake lending platform that bills itself more secure than traditional home equity lines of credit, and by taking a 40% equity stake in a property can reduce mortgage payments by 35%.
If Fraction were enlisted at the transaction’s outset amd put up 40%, the purchaser would then only need to secure mortgage financing for the remaining amount.
“If you own a home and want to take some equity out of it, your existing option is you could sell, get a HELOC or reverse mortgage, but we think our option is better because you can sell up to 40% of the future value of your home to us. It’s almost like selling shares in a home,” said Fraction’s Chief Technology Officer Josh Baker.
Baker also touts the platform as an easier way to invest in additional real estate properties.
“If you want to invest in real estate in Vancouver, you could buy securities from us, which will represent a pool of properties in the city, and the value of those securities is debt-protected,” he said. “Because we’re investing in residential real estate, we’re using the fundamentals of a mortgage, meaning it’s a mortgage charge on title, and that’s how we secure our stake in the property. That also means the principal is secure.”
Last week’s federal budget included a Canada Mortgage and Housing Corporation equity stake incentive for first-time buyers, but it’s capped at 10%. Additionally, household income cannot exceed $120,000 nor can the total cost of the home be greater than four times that amount. Baker says Fraction isn’t as restrictive.
“Our investment is quite a bit safer because it’s not a down payment,” he said. “It’s still a mortgage on title, so it’s way safer than the CMHC one, which will probably be more like a down payment itself. What that mean is we’re open to a much larger pool of capital because it’s a much safer investment.”
If the owner of a home worth $1 million—which isn’t uncommon in Vancouver—wants to take out $200,000, they can sell 20% to Fraction, and if they sell the home four years later when it’s worth $1.5m, the 20% is worth $300,000.
“You pay us the $300,000 at sale and you keep the remaining $1.2m,” said Baker.
Canadian properties have historically appreciated 5.5% per annum, and if the property in which Fraction invests fails to increase by that much there’s a built-in interest rate of 3%—although the rate will vary by region once the company launches in other parts of the country.
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