Reverse Mortgages (CHIP)
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.
This deal came in from a Top Broker in Ottawa. The client was referred to her by a Real Estate Agent who was representing the client as a purchaser looking to buy an investment property.
- 60 years old, retired – receives minimal pension income with sporadic other income that is difficult to confirm.
- There was an approval at a conventional lender, but the conditions were not able to be met to verify income
- Principal Residence (value $625k) no mortgage outstandingPurchasing an investment property for $210k
- Set up a CHIP with a limit of $210K, fully advanced to finance the purchase of the condo.
- She was able to leave her investment portfolio to continue to grow.
- She is generating some additional investment income, as well as having an asset that continues to appreciate.
- The accruing interest on her CHIP is tax deductible as it is being used for investment purposes
- Client – increased cashflow, leveraged her assets without collapsing investment to purchase an income generating and appreciating asset.
- Real Estate Agent – satisfied client, sold a property,
- Mortgage Broker – new client, helped a senior with their investment planning
Reach out to your Mortgage Broker to let them know of your interest in this program.
Set up a meeting with them to discuss the benefits of using a CHIP to help you find financing opportunities that actually suit your needs. I’d be more than happy to meet with you to outline how I may help.
If you’d like to set up a time to meet and discuss how you can incorporate CHIP in to your financial plans, please let me know. If I can help one senior because of our time together, then it’s time well spent.
For more information contact The Wilson Team or call 613-695-9250
The client was referred to the by a family friend who was trying to help his sister out of a sticky situation with her home. He knew that his Agent would be able to help his sister out.
- She was in a pretty bad financial situation and very stressed about that and she had a badly leaking roof and some other issues with her home.
- She was hoping to get some funds to make the necessary repairs to sell her home.
- Her only income is OAS and she couldn’t afford to maintain her home and she knew she wouldn’t be able to carry a mortgage payment.
- She had let her home insurance lapse since she couldn’t afford it.
- She was thinking she could get a small mortgage or HELOC but unfortunately did not qualify.
- She was very happy to know she had an option to get some funds to make the repairs, pay some other outstanding bills and not have any payments.
- And she’s also very happy that she’s going to be receiving ongoing payments, and can make additional draws down the road if needed.
- Without the CHIP, she was going to sell her home, which she didn’t want to do, and now her home is repaired, and she is very relieved to be able to stay in her home as long as she wants with home insurance in place, repairs are done, bills are paid, and no pressure to move.
- She is a very satisfied, stress-free customer.
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