When you have reached the young age of 55 years, there are many options that become available with respect to the financing of your home. That being, accessing the equity your home has built up to fund your retirement plan. Such as; paying off debt, taking that long wished for world cruise, helping the grand children and more. With baby boomers becoming the all-time record holder for the pensioner populace, reverse mortgages are getting much more popular and in demand.
A reverse mortgage is secured by the equity in your home, which is that portion of your home’s value that is debt-free. It allows homeowners to obtain cash from their equity without having to sell their home and while there are many advantages, there are disadvantages. You should certainly be aware of both.
Not all lenders offer reverse mortgages. The CHIP Home Income Plan, now called a CHIP Reverse Mortgage, was created by Home Equity Bank, a Schedule 1 Canadian Bank. It was founded 30 years ago as an annuity based solution addressing the financial needs of Canadians who want to access the equity of their top asset – their home. The only provider of reverse mortgages in Canada is Home Equity Bank and is offered through The Wilson Team your local mortgage broker.
A reverse mortgage is certainly one viable option however it is always best to sit down with your mortgage adviser and look at all the possible financing options that are available. You should be aware that Home Equity Bank must be in first position so there can be no other debts registered against the property when it funds.
The CHIP mortgage allows you to access the value in your home without having to sell and move away. The money you receive is tax-free and yours to use as you wish so long as the CHIP mortgaged property remains your principle residence.
The CHIP mortgage can do the following:
Personal goals it can satisfy;
- Pay off debts to lower monthly budget
- Handle unexpected expenses easily
- Help your children or grandchildren
- Improve your day-to-day standard of living
- Make a special trip or purchase
- You don’t have to make any regular payments on the loan.
- This income does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be receiving.
- You maintain ownership of your home
- You can decide how you want to receive the money.
- Does not require income to qualify or good credit
Options for receipt of funds;
- a lump-sum payment
- a loan to set up planned advances that provide you with a regular income, or
- a combination of these options.
- Reverse mortgages do not have to be repaid until you sell your home or you or your surviving partner pass away.
- The freedom to eliminate monthly payments can be a benefit for stretched budgets.
- You can repay the loan at any time.
- If the investment market takes a downturn, a reverse mortgage could fill the gap until your investments stabilize or reach maturity.
- The amount you owe can never exceed the value of your property.
- You and your beneficiaries will not be responsible for any shortfall if interest rates increase and housing values drop.
- Interest paid on the reverse mortgage is tax deductible if the proceeds were used to earn investment income (interest or dividends).
The most important advantage of CHIP is that you are not required to make any payments on your home for the funds you have borrowed until your home sells or you have reached your max borrowing amount; which is usually determined by the percentage of the (LTV) loan to the value of your home. Since the home can continue to grow in equity, the amount borrowed can shift. You can borrow up to 55% of the value of your home without making one payment. Essentially the interest grows and accumulates on the money you borrow and does eat away at your equity. If you sell or it becomes your non primary residence then the loan becomes due and is to be paid in full.
- If you do borrow from your home to invest then it is considered a leveraged investment and could add additional risk even if the interest is tax deductible – be cautious of what the investment is.
- Mortgage rates for CHIP’s are generally a few points higher than market mortgage rates in Canada making them more expensive than traditional mortgages or secured lines of credit and early payment of all or a portion of the amount borrowed could subject you to prepayment penalties. The penalties can be much higher than traditional mortgages or LOC;s.
- Borrowing against your home will impact the amount available to pass on to your beneficiaries as the equity decreases.
- Start-up fees can be a bit higher. Start-up fees depend on options selected but typically include an application fee, home appraisal fee, and costs for independent legal advice. Fees can easily reach $2000 to $2500 which is deducted from the principle received.
- The amount you can borrow through a reverse mortgage is different for all homeowners. It is based on many factors such as; geographic location, the type of housing you own, your age and gender, and the amount of your current debt on your property. A reverse mortgage may not be an option depending on those circumstances.
Information that we would require in order to advise you appropriately;
- How much money do you require?
- How much is your monthly intake now and in the future? What can you count on?
- What kind of lifestyle to you want to lead?
- What does your estate planning look like?
- What will happen if you are not able to stay in this home and or require assisted living?
- What other Options are available for you? One option could be downsizing and putting your equity into your pocket. There are many more.
Sometimes it does make better sense to take advantage of the lower rates and access a traditional mortgage or a secured Line of Credit which allows you to take out the equity at a lower rate and or make interest only payments. It will all depend on your income, your cash flow, and proper planning. We work with some of the best financial planners that can also work with you as your advisors to determine the best fit.
For more information contact The Wilson Team or call 613-695-9250
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