Fraction is an innovative company that’s reimagining the HELOC. It operates in British Columbia and Ontario as well as Washington State. It allows borrowers to take out a no-payment loan using a portion of their house as collateral. The repayment begins after ten years or when a borrower sells their home.
Borrowers pay a minimum interest rate of 5.83-7.08% APR when the loan is repaid, but the “effective” interest rate could rise because Fraction buys an equity stake in your house. Fraction’s maximum interest rate is 11.85-15% APR. The minimum and maximum APR depend on the loan term (longer loans have higher rates).
What Is Fraction?
Fraction is a HELOC company that is reimagining the HELOC lending space. The lender, which operates in British Columbia, Ontario, and Washington State operates more like a home equity “investor.” The loans it issues have interest rates that are tied to your home’s value rather than to some external interest rates.
As a borrower, you will pay interest rates between 5.85%-11.85%, but the exact amount you pay depends on the value of your home when you sell. The faster your home price grew during the borrowing period, the higher the interest rate you’ll pay. But Fraction caps the maximum interest rate, so you can capture additional upside if your house grew at an astronomical rate.
What Does It Offer?
Fraction offers HELOCs for paid-off homes in British Columbia, Ontario, and Washington, but these aren’t traditional HELOCs. The Fraction HELOC has a unique array of features.
Must Have A Paid-Off House
Fraction must have a first-lien position on your house. That means you must own your house free and clear to take out a loan from Fraction.
Can Be Used To Buy A House
The only “exception” to the paid-off house rule is for homebuyers who want to use Fraction to buy a house. Fraction has a maximum LTV of 35% for ten-year loans, so borrowers need to put at least 65% down to get a 10-year loan.
Access Up To $1.5 Million Immediately
Fraction offers HELOCs up to $1.5 million or 45% (35% for 10-year loans) of your home equity position. Once approved, borrowers can get cash immediately.
No Monthly Payments For The Loan Term
Fraction offers five and ten-year HELOC terms. During the borrowing period, borrowers pay no monthly payments.
Floating Interest Rate Based On Your Home’s Value
The Fraction interest rate always falls in a range between 5.83%-11.85% APR for five-year loans. Ten-year loans have interest rates ranging from 7.08%-15%. However, the interest rate doesn’t depend on some external interest rate. Instead, the rate depends on your home’s value when you pay off the loan.
Full Repayment Required
When a borrower sells their home, their loan is due in full. The loan is also due in full when the loan term expires. Borrowers who cannot repay their loan may have the option to extend their loan for an additional five years.
Option For A 5 Year Renewal
Fraction offers a five and 10-year loan product, but borrowers can request a 5-year loan renewal when their term is up. The renewal is subject to a credit check and an appraisal. If approved, borrowers have to pay a 1% loan renewal fee.
No Out-Of-Pocket Costs
Borrowers pay a variety of fees including a 2.5% loan origination fee. However, this fee can be deducted from the proceeds of the HELOC, so your out-of-pocket borrowing costs are limited or even $0.
Very Limited Availability
Fraction only issues loans in British Columbia, Ontario, and Washington State.
Are There Any Fees?
When taking out a HELOC through Fraction you’ll pay a variety of fees including an inspection and appraisal fee, title insurance fees, and a 2.5% loan origination fee.
These costs can be deducted from the loan proceeds, so you will not have out-of-pocket fees at the time of borrowing.
Borrowers who choose to extend their loan beyond the initial five-year term will pay a 1% loan renewal fee at the point of renewal.
How Does Fraction Compare?
No matter how you slice it, Fraction offers a unique product. It’s important to compare Fraction to HELOCs, Reverse Mortgages (If you’re at retirement age), and home equity sharing arrangements, to see whether it makes sense for you.
Here’s a quick comparison with some of the more popular home-equity sharing products:
How Do I Open An Account?
The Fraction online Application is simple and secure. Applicants start by providing their property address, so Fraction can ensure the home is in the proper lending area. Assuming the property qualifies, users provide personal and financial information before submitting their basic online application.
To be approved, borrowers will undergo a credit check and a home appraisal to ensure that the asset can back up the loan.
Is It Safe And Secure?
Fraction is a technology company that is used to doing business online. Its website is secure and encrypted to help keep user information safe. It is also a BC licensed mortgage broker in Canada and a member of the National Mortgage Lending Services in the US. These accreditations show that Fraction is required to uphold a certain set of standards to protect borrowers. In the US, this includes showing borrowers loan and fee documents.
How Do I Contact Fraction?
The United States-based headquarters for Fraction is 2120 University Ave, Unit 407, Berkeley, 94704. In the United States, you can call Fraction at 1-844-562-5546. People with questions can also use the contact button in the bottom right corner of the Fraction website.
Is It Worth It?
Fraction has an interesting value proposition, but the effective interest rates on the loans seem high, even given the rising interest rate environment that we’re in today. That said, no payment loans are unique, and they offer value to people who want to access their home equity without increasing their monthly outflows.
In general, tapping into home equity for luxury spending isn’t a great idea. But using home equity to invest elsewhere, or to pay for truly important expenses (kids’ college for example) can be a decent option. Before you use Fraction, compare it to other loan options to make sure you get the best deal.