The Reverse Mortgage (Canadian Home Income Plan or CHIP) has become reasonably popular in recent years.
A reverse mortgage allows home owners to convert equity in their homes into cash, without selling the property or having to make monthly payments.
To qualify, home owners must:
- be at least 62 years old,
- have significant equity in their property and
- live in Ontario.
Reverse mortgages are for between 10% and 40% of the appraised value of the home, depending on the homeowner’s age. The older the homeowners, the more they can borrow.
The homeowner retains ownership and possession of the house. The lending company registers a reverse mortgage against the property. At death, or when the house is sold, the loan and the accrued interest must be repaid.
The biggest disadvantage to reverse mortgages is that the interest keeps building on the amount of money borrowed (hence the maximum 40% loan). This means that if you borrow $50,000 this year and your interest bill is $5,000, next year your interest will be charged on $55,000 and so on. The longer the loan is in place, the greater the interest bill that has to be paid.
It is possible that when the house is sold, 100% of the proceeds from the sale may be required to pay off a loan. If the homeowner dies, the estate will have to pay off the loan and the accrued interest. This may wipe out any inheritance for the homeowner’s heirs.
An alternative is to establish an equity credit line. This allows you to take funds only as you need them, thereby owing the least interest possible, with no surprises.
A CHIP Home Income Plan is a loan secured by the equity in your home.
A CHIP Home Income Plan is designed exclusively for homeowners age 60 and older. This age qualification applies to both you and your spouse.
You can receive from $20,000 to $500,000 from your home equity. The specific amount is 10% to 40% of the current appraised value of your home, based on your age and that of your spouse, and the location and type of home you have.
You receive the money tax-free. It is not added to your taxable income so it doesn’t affect Old Age Security (OAS) or Guaranteed Income Supplement (GIS) government benefits you may receive.
You can use the money any way you wish. Maybe you want to build up your savings and have extra income to cover your expenses. Perhaps you want to update your home or help your family without depleting your current savings. Or you have debts and monthly payments you’d like to get rid of. The only condition is that any outstanding loans secured by your home must be retired with the proceeds from your CHIP Home Income Plan.
No payments are required while you or your spouse live in your home. The full amount only becomes due when your home is sold, or if you move out.
You maintain ownership and control of your home. You will never be asked to move or sell to repay your CHIP Home Income Plan. All that’s required is that you maintain your property and stay up-to-date with property taxes, fire insurance and condominium or maintenance fees while you live there.
You keep all the equity remaining in your home. In our many years of experience, 99 out of a 100 homeowners have money left over when their CHIP Home Income Plan is repaid. And on average, the amount left over is 50% of the value of the home when it is sold.
Your estate is well protected. CHIP guarantees that the amount to be repaid will never exceed the fair market value of your home at the time it is sold. If your heirs want to keep your home, they can repay the CHIP Home Income Plan from other funds.
You can save on taxes. If you decide to use the money you receive to buy non-registered investments such as GICs and mutual funds, you may be able to deduct the CHIP Home Income Plan interest charges from the income those investments earn. Be sure to consult a financial or tax advisor.
You can choose your interest rate term. Your interest rate will be based on the length of term you choose.
You receive an automatic annual interest rate discount. An interest rate discount is given based on the length of time you have your CHIP Home Income Plan. Regardless of the term selected, after three years, the rate at that time will be discounted by 0.25%, and will be discounted an additional 0.25% each year thereafter to a maximum of 1.50%.
You have a number of payment options.
- No payments are required for as long as you or your spouse live in your home.
- If you wish, you can pay all or part of the accrued interest once every calendar year. The payment must be a minimum of $1,000 and can be made at any time during the year.
- The full amount only becomes due when you and your spouse pass away, when the home is sold, or if you both move out.
- You have the option to repay in full at any time. When you repay, an interest rate differential may apply (limited to 3 months’ interest). If you repay within the first three years, a prepayment amount will apply. These may be waived or reduced in the event of death or a move to a long-term care facility or retirement residence.
There are some set-up costs. The independent home appraisal typically costs $175 – $250 in major cities, but may be somewhat higher in rural areas or in cases of unique properties. Fees for independent legal advice are typically $300 – $600. Closing costs of $1,285 will be added to your CHIP Home Income Plan, which means you don’t have to pay it directly.
You can apply here: www.chip.ca