I recently helped a client who had some common misconceptions of a CHIP Mortgage. Christine owned her home with a small line of credit she secured 5 years earlier. She is 70 years of age with some pension income. Christine was concerned about the balance on the line of credit and with the higher cost of living how she would continue to make the payments. She didn’t want to sell her home and she didn’t want to worry her family. Her family wanted to explore the option of a CHIP Reverse Mortgage. But Christine has some concerns based on her understanding and misconceptions of a CHIP Mortgage. Her main concerns were the bank would own her home and could take her home at any time and she would have no equity left to leave in her estate to her family.
We reviewed her application and based on her age and the value of her home we were able to approve her for a CHIP Mortgage sufficient to payout the existing line of credit, give her some additional cash in hand and leave the balance available to her to take out in a lump sum or monthly amount if needed. This increased her cash flow each month with no payment to the line of credit, gave her a nice nest egg to access for any short term medical needs or expenses. The other available funds were there as well if she needed to increase her monthly cash flow due to a rise in the cost of living. Even with the CHIP Mortgage amount she left 70% of the equity in her home which would appreciate over time for her estate. Her family was happy she did not have to worry about money and she had the peace of mind she was able to keep her home and leave something for her family.
“Last year I researched options for my mother, who owns her own home but has a small pension, to be a bit more flexible with her money. I contacted Pauline, our family’s Mortgage Consultant who explained some possible solutions. The reversed mortgage concept particularly appealed to us as it allows my Mom to have access to cash when she needs it, which makes her feel more comfortable and less anxious about potential large expenses in the future. Pauline was a wonderful resource and sounding board for us and guided us every step of the way. My Mom, who is the careful type, had tons of questions and Pauline took the time to answer every single one. The reversed mortgage has been a real blessing for my mother. Thank you, Pauline!” Phil G
Many homeowners have beliefs about how a CHIP Mortgage works but are not clear on the main benefits and protection offered by the program.
Top 3 Misconceptions About a CHIP Mortgages:
1. The Bank Owns Your Home.
Over 50% of Canadian homeowners over the age of 65, believe the bank owns your home once you’ve taken a reverse mortgage. Not true! The bank simply registers their position on the title of the home the same as any other bank would register a mortgage. The difference is in the collection of payments on the mortgage. With a CHIP Mortgage the home owner does not have to make payments. The mortgage payments can be capitalized back into the mortgage. The full amount of principal and interest is payable when the home is sold or the homeowner(s) die.
2. Your Estate Can Owe More Than Your Home
A CHIP mortgage cannot seek any further compensation from the borrower – even if the collateral asset (property) does not fully cover the full value of the loan upon payout of the mortgage. Therefore, when the last homeowner dies (and the reverse mortgage is due), the estate will never be responsible for paying back more than the fair market value of the home. The estate is fully protected – this is not the case for almost any other mortgage loan (specifically secured lines of credit) in Canada, which is full recourse debt.
3. The Best Time to take a Reverse Mortgage is at the End of Your Retirement
1. 91% of Canadian seniors have no plans to sell their home (CBC News “Canadian Boomers Want To Stay In Their Homes As They Age).
2. You are missing out on a huge tax-saving opportunity by not taking out CHIP mortgage in the beginning of your retirement.
“Research has consistently shown that strategic uses of reverse mortgages can be used to improve a retiree’s financial situation, and that reverse mortgages generally provide more strategic benefits when used early in retirement as opposed to being used as a last resort.” – Jamie Hopkins, Forbes
In Canada, a CHIP reverse mortgage can be set-up to provide homeowners with a monthly draw out of the approved amount. For example: client at age 65 is approved for $240,000 and decides to take $1000/month. This is deposited into the clients’ bank account over the next 20-years. They use those funds to increase their monthly cash flow or invest the money till they turn 71. Interest accumulates in the CHIP Mortgage only on the amount drawn (i.e.: not on the full $ amount at the onset).
This strategy allows clients to draw down less income from their savings/investments to support their retirement lifestyle. In turn, this can create some excellent tax savings, since home equity is non-taxable. Imagine lowering your nominal tax bracket by 5 – 10% each and every year over a 20 year period! The tax savings can be huge. You are also able to preserve your assets allowing them to grow which can generate a higher rate of return when invested over a greater period of time.
For more information on the CHIP Mortgage or to review your financing needs before or during retirement contact your Certified CHIP Mortgage Specialist, Pauline Tonkin at 604 813 8402