Should Vancouver Seniors Consider CHIP?

January 3, 2013

CHIP Home Income Plan reversed mortgageCHIP Home Income Plan is a Canadian reverse mortgage offered by HomeEquity Bank of Canada. It is popular income plan for senior who can tap the equity in their homes without having to worry about making any interest or principal payments. The mortgage only comes due when the borrower dies, sells their house or move out permanently.

With a reverse mortgage, home owners can borrow up to 50 per cent of the appraised value of their home. They repay the principal – and interest that has been accumulating – when they sell it.

As more boomers hit retirement age, reverse mortgages are growing in popularity. Reverse mortgages may be a good fit for some seniors, the products may not be suitable for everyone. Although the are other options for seniors, reverse mortgage is appealing to many seniors and it has many advantages to the borrowers. It is important to know how reverse mortgages work, how much they cost and the pitfalls to avoid.

Misconception on loss of equity 

There are 2 important numbers that will determine what happen to your home equity after 10 or 15 years. The interest rate of your reverse mortgage and the rate of appreciation of your home. When CHIP Home Income Plan was able to receive funding through HomeEquity Bank, the lower cost of funding effectively reduced what used to be 7.5% or more interest rate to just under 6% for 5-year fixed rate mortgage.

Home appreciation is equally important in affecting the final outcome of the mortgage when it is paid out. If 50% or $300,000 is taken out from a clear-titled $600,000 home, the equity remaining in the house is $300,000. Assuming at 3.00% appreciation annually (assuming property value barely keep pace with inflation of 3.1%), the equity value of a $600,000 home after 15 years is just under $935,000.

A borrower taking out $300,000 reverse mortgage would have the money for their use. The money would improve the borrower’s lifestyle, and if part of the money is invested wisely, it would have generated extra income for the borrower.

Net equity value at the time of paying out the mortgage 

If a variable rate mortgage of 5.00% is used (Annual Percentage Rate (APR) is 6.02%), at the end of 15 years, the $300,000 loan will have outstanding loan plus interest around 550,000. The difference between the property value and the loan and interest owing is $385,000.

If you like to discuss your situation, or like to find out if reverse mortgage is for you, kindly contact me (Elsie Tse) at 604-716-3369 or Email Me 

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