Financial Advice: Should I Get a CHIP Reverse Mortgage

Many older Canadians are faced with the situation of being “money poor” but “house rich”, which means much of their net worth is tied up in the equity in their home. To access that equity in their home they can apply for a CHIP or Reverse mortgage to receive a lump sum or monthly income to meet those needs. 

What is a CHIP Reverse Mortgage?

A Canadian Home Income Plan (CHIP) Reverse Mortgage is the opposite of a mortgage. You obtain a regular mortgage when you do not have cash to purchase a home, which you borrow from a bank and they will charge you interest. Over time the amount owed decreases as you make payments until you own the home. A reverse mortgage is when you own the home but want to reverse this process and the bank will pay you cash and grow the mortgage balance you owe. There are no payments bank to the bank and interest would accrue and compound behind the scenes. This is a “non-recourse” loan which means the liability to you cannot be larger than the value of the home. When the home is eventually sold the bank would be paid back first and you would receive the balance. 

Advantages of a CHIP Reverse Mortgage

Retain Ownership 

Many people do not want to lose ownership of their home, this allows an individual to retain ownership and also meet their cash requirements.

Out of Sight / No Payments

This will give you access to cash without the need to make cash payments back. If you were to use a line of credit or mortgage to access the equity, you would be required to make monthly payments to keep the debt ongoing.

Easy Application

The application for this product is relatively easy due to not having to make payments. The largest factor is the value of your home vs. the creditworthiness of the individual in traditional borrowing.

Tax-Free

Proceeds from a CHIP Reverse Mortgage are tax-free because you are essentially just borrowing against your home.

Disadvantages of a CHIP Reverse Mortgage

Compounding Interest

The interest rates on these products are usually on the higher end of current mortgage rates. Without payments, the balance will accumulate very quickly over the years. A $100,000 lump sum can double to $200,000 within 7-8 years (at current rates), this can double again to $400,000 in 14-18 years. 

Out of Sight / No Payments

While there is peace of mind in not making payments, individuals can quickly forget the accumulating interest behind the scenes. 

High-Cost Solution

This is a high-cost solution and will likely cost individuals more than selling their home and using the proceeds. This is especially true in longer-term scenarios with the accumulation of interest.

Example Comparisons

House Value: $1,00,000
Time Period: 5 Years
Current 5 Year Reverse Mortgage Rate: 8.50% (www.rates.ca)
Current 5 Year GIC Rate: 5.00% (www.ratehub.ca)
House Growth: 3.89% (expected Canadian Real Estate Growth Rate, www.statista.com)
Tax Rate: 20% (low-income earner)

Lump Sum: $100,000

CHIP Reverse Mortgage 

Receive: $100,000 today
Amount owed after 5 years: $150,366
House Value: $1,210,000
Total Net Value After 5 Years: $1,059,634

Selling your Home and Using a GIC

Receive: $1,000,000 today
Invest: $900,000 into GIC
Amount of GIC after 5 years: $1,094,988

In comparison, this individual would financially benefit from selling their home rather than using a CHIP Reverse Mortgage by about $35,000. 

Income: $40,000 per year

CHIP Reverse Mortgage 

Receive: $3,333 monthly ($40,000 annually)
Amount owed after 5 years: $244,784
House Value: $1,210,000
Total Net Value After 5 Years: $965,216

Selling your Home and Using a GIC

Receive: $1,000,000 today, invest into a 5% GIC, $50,000 pre-tax interest annually, $40,000 after-tax
Invest: $1,000,000 in a GIC
Amount of GIC after 5 years: $1,000,000

In comparison, this individual would financially benefit from selling their home rather than using a CHIP Reverse Mortgage by about $35,000. The individual would receive $50,000 in interest but only $40,000 in after-tax income. The principal amount of the GIC would still be $1,000,000.

These are basic comparisons, they do not include real estate fees or the cost of either scenario. If you keep your home there are property taxes, maintenance/renovation costs, physical upkeep, etc. If you were to sell your home, you would still need a place to live and there would be additional costs in renting or purchasing a new home.

Should You Get a CHIP Reverse Mortgage?

This is a niche product and does suit some individuals depending on their situation but is not without risk. The interest rates on these products are high and the compounding effect on the interest can get out of control. Because of this, it would not be recommended as a long-term solution for individuals but can serve as a good short to medium-term solution. This unique solution should be reviewed with a trusted financial advisor or financial specialist due to the potential benefits/risks and scope of the individual's unique scenario. 

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Justin, Konrad, and Merriel

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More articles and information are available at www.knowprotectgrow.com 

Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research

Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.

Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by the author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions, and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

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