The new First-Time Home Buyer Incentive offered through the Canada Mortgage and Housing Corporation already has some competition.
Vancouver-based Fraction is a lending platform that’s not only positioning itself as a more secure option to traditional home equity lines of credit but also claims it can reduce mortgage payments by up to 35% by taking a 40% stake in a property.
If Fraction were enlisted at the transaction’s outset and put up 40%, the homebuyer would then only need a mortgage 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.
If the owner of a home worth $1 million 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,” continued Baker.
Historically, Canadian properties appreciate 5.5% per annum, and if the property in which Fraction invests fails to meet the threshold, it has a built-in interest rate of 3% and collects on whichever of the two is greatest. The rates will vary by region, added Baker.
Juxtaposed with the CMHC program, which offers up to 10% on a new build and 5% on a resale, Fraction doesn’t have the same restrictions. There is neither a cap on income nor on the equity share. Moreover, Fraction isn’t limited to new purchases.
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.”
There are also checks and balances in place to protect against a devalued property, whether because of damage or market correction.
The firm launched quiet but intends on entering the Ontario market next and eventually other parts of Canada. Unlike the CMHC program unveiled in last week’s federal budget, Baker says Fraction offers more protection.
“Our investment is quite a bit safer because it’s not a down payment; it’s still a mortgage on title, so it’s way safer than the CMHC program, 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.”