As retirees and seniors approach a new stage in their lives, they are faced with a common question: How do I facilitate a comfortable and financially independent retirement? In developing a financial plan (often including a reverse mortgage), senior homeowners can leverage the equity in their home to help finance their retirement and unlock their wealth. Today 51% of seniors carry debt into retirement with retirees having a 50% chance of living until they are 92. It is of concern that 50% of retirees believe they will run out of money within 10 years.
The Chip Reverse Mortgage and the Income Advantage Plan are common financing options available for seniors that unlock the value in their residential home tax-free. Both options allow seniors to unlock equity in their home and can lead to a more fulfilling retirement, however they have key differences that must be considered before deciding which route to take.
About 91% of Canadian Boomers want to stay in their home or current neighborhood and live independently as long as possible. With a CHIP Reverse Mortgage these desires are accessible to more Canadians.
These alternatives are often better considerations than accumulating other consumer loans and credit card debt at higher interest rates. Canadian conservativism has dictated a reluctance on behalf of seniors to unlock the equity in their homes. This is changing with over 450 million in reverse mortgages being granted in Canada in 2016, a 26% increase over 2015.
Chip Reverse Mortgage
The Reverse Mortgage allows homeowners to access cash immediately without making any payments until the home is sold or you move out. All interest is deferred until the final repayment, which is covered by the sale of the home. Homeowners over the age of 55 can secure up to 55% of their home’s value in tax-free cash, regardless of the homeowner’s credit score or Fixed Income. Interest rates are slightly higher for Reverse Mortgages than conventional mortgages. There are no medical checks and no regular payments are required.
Homeowners seeking a Reverse Mortgage can receive between $20,000 and $750,000, none of which will affect any Old Age Security or Guaranteed Income Supplement government benefits that the homeowner may be receiving. When the home is eventually inherited by the homeowner’s beneficiary, the home can be sold or remortgaged with a standard mortgage to pay off the Reverse Mortgage. On average, 50% or more of the home’s value is still equity by the time the Reverse Mortgage is paid off. Regardless of how long the senior homeowner remains in the home, the principal and interest owed for the Reverse Mortgage will never exceed the value of the home, ensuring there is no financial burden on their future beneficiaries.
- Need to eliminate debt
- Have minimal fixed income
- Have little or no investments
- Wishing to renovate or make improvements to current home
- Building a new home or condo and require a deposit or progress payments
- Purchase a second or vacation property
- Looking to establish living inheritance or gift tax free for their children or grandchildren
- Wish to provide a down payment gift to their children for their first home
- Wish to keep their current or new home late into retirement
- Handle unexpected expenses
- Pay for in-home care or medical expenses
- Travel or make a purchase
- Unforeseen costs of grey divorce
- Could prevent bankruptcy
Income Advantage Plan
The Income advantage option allows a borrower to access their loan in three ways: 1) through a lump sum advance, 2) through monthly payment and 3) Partial initial advance and open for future advances. These alternatives allow a senior to be more mindful of their monthly budgeting and reduce their interest cost. Interest is only charged once you receive the advance of funds.
This alternative is ideal for clients who:
- Have a monthly cash flow need
- Wish to minimize long term tax liability
- May have some debt
- Have a line of credit available
- Are drawing down investments faster than desired
- Protect their estate by funding insurance needs
- Wish to enjoy retirement and travel more
- Portfolio has not performed as well as planned
- Supplement monthly pensions
Some Conditions for the Borrowers
- Valid and fire insurance must be carried
- Property tax is paid annually
- Pre-payment of 10% of loaned amount (principal) annually at no cost
- After 5 years, no cost on payments made within 30 days following a rate reset date
- Any prepayment penalties are waived at death
- Interest only payments are permitted on a monthly basis; however, they are not required
Closing Costs – Paid by borrower
- Property Appraisal Costs
- Independent Legal Advice
- Title Insurance
- Administration and Closing Fees
CHIP Opportunities When Choosing a New Seniors Living Residence or Condo
- Provide deposit for new condo or home purchase by using CHIP on existing home
- Update existing home to get ready for sale
- Provide for purchase of new Condo or Home. If property being purchased is a rental, then blanketing the existing owner-occupied home and rental is an option
- Use CHIP Income advantage to assist with monthly condo and living expenses
Making the Decision
When deciding between which financing option is best, it is important that the homeowner realize the benefits and risks associated with each option. Reverse Mortgages are excellent for those who would like to receive cash either up front or monthly without having to worry about monthly interest payments. If the homeowner is a senior that does not need flexibility in cash flow and is comfortable on a fixed income, a Reverse Mortgage might be best. This option is also suited for those who have trouble making monthly payments or cannot achieve credit approval for a Conventional Mortgage or Home Equity Line of Credit.
Rob Carrick of the Globe and Mail stated on June 28th in his Globe Investor Personal Finance Column that “there are three trends in the use of reverse mortgages that include – strong price increases over the past decade in many housing markets, rising debt levels and an unwillingness to compromise our lifestyles to save more.”
When looking to unlock the equity of their home, it is important for seniors to consider both options and decide which is best for them. The previous costly nature of the product surrounding Reverse Mortgages has completely changed in the last five years. It is more affordable now. In Canada, CHIP Reverse Mortgages and The Income Advantage Plan are offered through Home Equity Bank by Licensed and Certified Mortgage Professionals.
There are many residential developments in South Georgian Bay such as Balmoral Village and others that are very attractive to retiring couples. In many cases a Reverse Mortgage can provide a deposit, down payment or purchase monies before their current residence is sold.
This Mortgage Alternative is only available through Home Equity Bank in Canada who have conducted much research on the credit quality of seniors and who have had a tremendous track record in offering this product in Canada. Home Equity Bank is a Federally Regulated Schedule 1 Bank and the only Canadian Bank exclusively dedicated to serving seniors. Other Chartered Banks or National Mortgage Companies in Canada do not offer Reverse Mortgages.
He will treat your mortgage as his own.