I have been asked recently regarding the ads on TV about the CHIP Home Income Plan and what a reverse mortgage is all about. I will give a brief overview about who would use this product, what a reverse mortgage is and what to consider.
If you are in need of additional income or have an unplanned expense during retirement a reverse mortgage is designed for homeowners 55 years of age and older. A reverse mortgage is secured by the equity in the home, which is the difference between the value of your home and the unpaid balance of any current mortgage. It allows homeowners to obtain cash without having to sell their home.
The Canadian Home Income Plan (CHIP), which is offered by HomeEquity Bank, is what you see advertised, however there are other financial institutions that offer reverse mortgage products in Canada. You can also speak to me about other options that may meet your needs.
With a reverse mortgage you don’t make any payments. Instead, the interest on your reverse mortgage accumulates, and the equity that you have in your home decreases with time. If you sell your house or your home no longer is your principal residence, you must repay the loan and any interest that has accumulated.
Before you decide to get a reverse mortgage, take the time to understand all the terms that apply, and to weigh the pros and cons.
Pros
– You don’t have to make any regular payments on the loan.
-You can turn some of the value of your home into cash, without having to sell it.
– The money you borrow is a tax-free source of income.
– 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. You can choose to receive: a lump-sum payment
– a loan to set up planned advances that provide you with a regular income
– a combination of these options.
Cons
– Reverse mortgages are subject to higher interest rates than most other types of mortgages.
– The equity you hold in your home will decrease as the interest on your reverse mortgage accumulates over the years.
– At your death, your estate will have to repay the loan and interest in full within a limited time. The time required to settle an estate can often exceed the time allowed to repay a reverse mortgage. For full details, check with the reverse mortgage lender.
– Since the principal and interest will be repaid to the lender at your death, there will be less money in your estate to leave to your children or other heirs.
– The costs associated with a reverse mortgage are usually quite high. They can include: a higher interest rate than for a traditional mortgage or line of credit
– a home appraisal fee, application fee or closing fee
– a repayment penalty for selling your house or moving out within three years of obtaining a reverse mortgage
– fees for independent legal advice.
CHIP set-up costs
Appraisal Fee
– Typically from $175 to $400 as an out-of-pocket cost.
– Actual amount varies by province and for urban and rural properties.
– Request for an independent appraisal is ordered through CHIP.
Independent legal advice is required
– Typically $300 to $600 as an out-of-pocket cost.
– Price range assumes no title issues.
– At your request, CHIP can provide a list of legal advisors in your area.
– It is recommended that you discuss fees with the legal advisor before proceeding.
Legal, closing and administrative costs
Option Legal, closing and administrative costs
Variable $1,495
6 month $1,495
1 year $1,495
3 years $795
5 years $0
– These costs will be deducted from your CHIP Home Income Plan funds so they are not an out-of-pocket expense.
– Includes title search, title insurance and registration.
Other options to consider
Before you make a decision, be sure you also consider:
– using your equity in your home to secure a different type of loan, such as a line of credit secured by your home equity or a regular mortgage,
– selling your home, and
– buying a smaller one,
– renting, or
– moving into “assisted living” or other alternative housing.
– talking to your lawyer about possibly selling your home to a family member or a third party, and including in the terms of the agreement a right to live there for the rest of your life.
Be sure you fully understand the terms and conditions of the contract before you sign it. By exploring all of your options, you will be better able to make the decision that best suits you.
Questions to ask before you sign
Ask all of these questions before you commit to a reverse mortgage:
– What are the fees?
-Are there any penalties if you sell your home within a certain period of time?
– If you move or die, how much time will you or your estate have to pay off the balance of the loan?
– At your death, what happens if it takes your estate longer than the stated time period to fully repay the loan?
– What happens if the amount of the loan ends up being higher than the value of the home when it’s time to pay the loan back?
To see if the CHIP home income plan is the best option for your situation and to find out how I can save you from paying any set up costs, contact me for a no obligation consultation.
The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. I recommend that you obtain your own independent professional advice (preferably me) before making any decision in relation to your particular requirements or circumstances
