Paramjit Singh (Mortgage Broker)"CHIP Reverse mortgage helps you convert your home equity into hard cash, without losing ownership of your home, and without having to make a single repayment".
Isn't this The Ultimate Deferred Mortgage Product?"!
Why CHIP Reverse Mortgage?
You have worked hard all your life to be a homeowner, haven’t you? Then why change it towards the later part of your life just for fulfilling a cash crunch?
What other option do you have apart from selling my house?” We’d expect your response to be along similar lines. But hey! We’ve got some good news for you!
A few of Canada’s financial institutions have come up with an effective financial arrangement to satisfy the liquidity requirements of senior citizens, known as a CHIP (Canadian Home Income Plan) reverse mortgage.
Why Reverse Mortgage Is Getting The Attention?
- The proportion of senior families with debt has gone up from 27% in 1999 to a whopping 42% in 2016.
- The proportion of senior families with mortgage debt has multiplied by a factor of 1.75x in the same duration, going up from 8% to 14%.
This Stat Canada data suggests that a large number of seniors have a lot of equity trapped in their houses. At the same time, they struggle to pay their existing debts and expenses. The home equity simply isn’t doing anything for them. Homeequity reverse mortgage product changes that completely.
It is the perfect solution to the issues of debt and availability of cash that are plaguing many senior families. Tap into your own home equity bank.
If you want to acquaint yourself even more with Equitable banks reverse mortgages, this article is just what you want to read! In this article, we shall introduce you to the concept of a reverse mortgage and everything associated with it.
What Is A Reverse Mortgage?
In its simplest form, a reverse mortgage is a loan secured against the equity in your home. Consider it as a loan that enables you to get money from your homeequity without actually having to sell your home.
It is a loan that is provided exclusively to homeowners aged 55 years or above. It is a means for homeowners to access a proportion of the stored value of their home without giving up their ownership rights.
A reverse mortgage enables you to effectively turn home equity into liquid cash that you can use today. Think of it as an ultimate deferred mortgage product where you don’t have to make any monthly payment until you sell, move out of the property, or when the borrower dies!
You may use to Reverse mortgage to pay off your medical bills or long term care expenses.
MYTH BUSTING TOGETHER: CHIP REVERSE MORTGAGE CANADA
A very common misconception about reverse mortgages is that your home equity reduces over the years if you don’t make any repayments. However, a simple example would prove this to be untrue.
Let’s say you borrowed $300,000 @4.99% per annum (connect with us for lower rates) interest rate from CHIP Reverse Mortgage on a house worth about $800,000 at present. You still have $500,000 of home equity remaining.
Now let’s assume that the amount is borrowed for 10 years, and that you didn’t make a single payment over 10 years.
The interest would keep compounding every year and would be added to the principal amount of $300,000.
At the end of the 10 years, the total amount you’d owe would be $491,108.
In the same time period, however, we can expect the house to appreciate by at least 3% annually. So a house worth $800,000 today would be worth $1,075,133 after 10 years.
Upon subtracting the amount due on maturity from the expected value of the house ($1,075,133 – $491,108), we get an amount of $584,026, which is the home equity you’d have after 10 years. As is evident, this amount is greater than the balance home equity you had at the outset ($500,000)
This proves that the argument of reducing home equity in reverse mortgage IS A MYTH!
How Does A CHIP Reverse Mortgage Work?
Under CHIP reverse mortgage, you can borrow up to 55% of your home’s current market price. The actual amount that you can borrow depends on various factors that need to be assessed by the lender.
The property on which the loan is taken must be your primary residence.
Unlike a forward mortgage (regular mortgage), the borrower doesn’t need to make repayments in a CHIP reverse mortgage until the loan is due. The loan falls due when the homeowner sells the house, moves out, or passes away.
The interest is added to the original loan amount, which increases over time if the interest payments are not made. The interest is only charged on the proceeds received, and not on the entire sanctioned amount.
In a reverse mortgage, the lender makes the payments to the borrower; i.e. the cash flow goes in the reverse direction. This is why the loan is referred to as a reverse mortgage.
The loan amount could be received in a lump sum or be divided into regular payments. You can also receive the amount in the form of a home equity line of credit.
Regular Vs Reverse MortgageWhile a regular mortgage advances funds to the borrower to buy the house, a reverse mortgage advances funds from the house you already own.
The eligibility criteria for a reverse mortgage is fairly simple – You have to be a Canadian homeowner and you must be at least 55 years old.
If you have a spouse as a joint owner of the property, then he/she must also be over 55 years old for you to be eligible for this loan.
To ascertain if you qualify for this loan in Canada, a reverse mortgage lender assesses the following factors:
- Your age and your spouse’s age
- Type of house (condo, detached, etc.)
- Location of the house
- Its appraised value
- Its overall condition
- Total mortgage liens and available home equity
- Up to date property tax
What Are The Associated Cost of Getting a Reverse Mortgage?
Costs associated with taking a reverse mortgage include:
- Interest rates
- Home Appraisal Fee
- Setup Fee
- Legal Fees
- Prepayment Penalty (if the mortgage is paid before it’s due)
The costs may vary depending on the lender you choose. Also, some costs could be added to the loan balance while some may need to be settled upfront.
What Are Reverse Mortgage Canada Pros and Cons?
Just like any high ratio or conventional mortgage, a reverse mortgage has its share of pros and cons too. Here are some of the most important of them.
- With a reverse mortgage, you are always in control of your home. You won’t be forced to sell the house or move because of fluctuations in property prices or your earning power. You can live in the home you worked for years to buy for the rest of your life!
- You can use the money for whatever you want after closing all existing credit instruments secured by your home, such as a home equity line of credit.
- The repayment amount would NEVER exceed the fair market value of your home when the loan becomes due. Your home won’t be a burden on you and your heirs.
- You or your beneficiaries would have no responsibility for making up for any shortfall if housing values reduce and interest rates rise.
- The lender has no right over the appreciation in the value of your home. It’s your house, so you enjoy that right! All you have to do is maintain the property and pay all the taxes and insurance.
- The money you receive, irrespective of whether it is a one time payment or a series of regular payments, is totally TAX FREE! You also have the freedom to decide when and how you receive your money.
- Access funds to buy investment properties.
- The money received from a reverse mortgage would in no shape or form affect the Old-Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits you may be getting.
- You can repay the loan at your convenience. There is absolutely no pressure on you to make regular payments. However, making regular interest payments would be advisable as it would help you retain the equity in your house
- The freedom from paying monthly installments would come in really handy if you have tight budgets.
3 Reverse Mortgage Canada Cons Worth Knowing
- Mortgage rate of Interest on a reverse mortgage are a bit higher as compared to those on a high ratio, conventional mortgage or line of credit. However, that disadvantage could be offset by the fact that you do not have to make any regular repayments.
- There is setup fees associated with reverse mortgages. Engage with a mortgage broker who is willing to take time and explain you on all the costs upfront so that there are no surprises
- Very few financial institutions specializes in this strategy
When it comes to mortgage contracts, any sort of misunderstanding or a misinterpretation can have huge ramifications.
So it would be advisable to have clarity about the following 5 issues from your lender beforehand;
What are reverse mortgage interest rates are you charged on the amount borrowed?
What fees you have to pay when you receive your money?
Are there any penalties if you sell your house within a specific time period?
Who holds the title ownership of the property?
- Can you get an Independent legal advice before signing documents?
To know if homeequity banks CHIP reverse mortgage or an Equitable banks alternative solution is better for you, connect with us to discuss it further today.
You will be glad you did!