Hi, I am Lucia Gugliuzzi
Mortgage Broker, Certified Reverse Mortgage Specialist
When talking about CHIP Reverse Mortgage, you need to take a look into a number of studies from more conservative population think tanks which have argued that there is no crisis in seniors’ savings if one considers housing assets and no need for expansion of public pensions. Even when accounting for seniors’ total net worth, studies show that only 28 percent of Canadian seniors without employer pensions have five years’ worth of savings.
Roughly half (47 percent) of Canadian families aged 55–64 have no accrued employer pension benefits in Canada. The vast majority of Canadians retiring without an employer pension plan have totally inadequate retirement savings — the median value of their retirement assets is just over $3,000.
Over half (55 percent) have savings that represent less than one years’ worth of the resources they need to supplement government programs like OAS/GIS and CPP/QPP. And fewer than 20 percent have enough savings to support the supplemented resources required for at least five years.
Even more startling: For those with annual incomes in the range of $25,000–
$50,000, the median value of their retirement assets is close to just $250. For those with incomes in the $50,000–$100,000 range, the median value is only $21,000.
CANADIANS WITH SAVINGS
Only a small minority (below 20 percent) of middle-income Canadians retiring without an employer pension plan, have saved anywhere near enough for retirement. What this means is the vast majority of these families with annual incomes of $50,000 and more will be hard pressed to save enough in their remaining period to retirement (less than 10 years) to avoid a significant fall in income.
Nearly half of Canadians count on inheritance for retirement — will they actually get any money? (From Global News, June 6th, 2017)
Almost half of Canadian investors expect to receive an inheritance, and many are counting on that money to help them in retirement. That’s according to a recent survey by global financial advisory firm Natixis Global Asset Management. The firm quizzed 300 Canadians with around $135,000 in investable assets in February, as part of a global poll.
Forty-five percent of Canadian respondents said they expect to receive an inheritance, and 77 percent said family financial resources would be a chief source of retirement funding.
The poll also found that 30 percent of Canadians are worried they’re not saving enough for life after work and nearly a third believe government benefits won’t be around when they retire. Also, Canadians are saving an average of only 9 percent of their annual income for retirement, according to the Natixis study. The global average, by comparison, is over 12 percent.
Taken together those numbers paint the portrait of a country where many are banking on an inheritance to bail them out in retirement.
But what if Canadians are misled in the belief that their elderly parents or a wealthy aunt will leave them a tidy sum to help plump up their golden egg?
SENIORS AND THEIR FINANCES
Burdened by debt, Canadian seniors may leave little behind….
That’s not an unlikely scenario. Seniors have been piling on debt faster than the population at large, a 2015 Equifax study revealed. The Credit Counselling Society has seen calls from older Canadians in financial distress increase by over 20 percent in the last 20 years.
According to a 2017 study by Ontario-based debt management firm Hayes Michalos, those aged 60 and older are now the fastest growing demographic at risk of financial insolvency.
“Having carried debt into retirement, seniors struggle to balance debt repayment with rising food, energy, medical and living expenses,” the report noted.
In areas like Toronto and Vancouver that have experienced skyrocketing home prices, cash-strapped seniors are increasingly resorting to so-called reverse mortgage options to cope with living costs that include soaring property taxes, said Chris Catliff, president and CEO of Vancouver-based BlueShore Financial.
Canadians counting on an inheritance may come up empty-handed after creditors have helped themselves to the deceased’s estate, said Scott Hannah, who heads the Credit Counseling Society.
Older Canadians are also helping their offspring earlier in life, potentially shrinking the size of their estate
A whopping 50 percent of Canadians don’t have a will, according to a recent TD Bank survey. And 28 percent of those without one are boomers.
BOOMERS DOWNSIZING? NOT NECESSARILY…
Canadian Home Builders Association March 2017
There are currently about ten million single- family dwellings in Canada, about 56% of which are occupied by Baby Boomers or older generations. Municipal planners have been anticipating a major transition as Baby Boomers gradually move out of their single- family homes, freeing them up to be “recycled” to younger households.
Yet such a trend is not a “sure thing”. Baby Boomers may well stay on in their homes longer than expected, and may in substantial numbers actually start to occupy even more space as they “age in place”. The 2011 Census showed that almost 3.9 million households, many of who were born in the 1950s and 60s, are staying on in single- family dwellings as empty nesters and even lone individuals.6
While some “recycling” is likely to take place in the next decade, growing evidence suggests this will be less than many expect. Many ‘Boomers’ intend to remain in their current family homes indefinitely. The move to “downsize” into other types of housing is simply not materializing at the level anticipated.
As a result, the numbers of single-family dwellings that younger families demand will not come through the resale market, especially in the fastest-growing urban areas.
Accordingly, it is estimated that only about half the requirement for single-family homes for younger generations will be met by “recycled” units vacated by ‘Boomers’ or others born before 1961.
Combining all of these factors, Altus Group estimates there will be a shortfall of up to 300,000 new ground-oriented dwellings over the next decade.
SO, WHERE WILL SENIORS LIVE?
If they’re not going to move until it’s time to go into a Long Term Care facility, how can you help them? How can you help their Boomer kids?
On a provincial level, where do seniors currently live?
“Everything you needed to know about CHIP Reverse Mortgage in Canada”
WHAT IS A CHIP REVERSE MORTGAGE?
A CHIP Reverse mortgage, also known as “Canadian Home Income Plan, is a loan that provides homeowners from 55 years of age and up with an option to borrow money based on their home equity. In simple terms, you can borrow money based on the current value of your home without having to sell your property. The CHIP mortgage allows you to borrow money up to a certain percentage of your home present value. The owner’s age also plays an important factor in the maximum amount of loan you can get in an equity release.
Another important aspect of a “CHIP” mortgage is that you never need to make monthly payments until the loan amount is due to the lender. It means that only in case you decide to sell your home or when the last borrower of the loan leaves or passes on, the loan will be repaid. Some things to consider are that the longer you live in your home without making a single payment, the more interest you need to be paid in the end as it accumulates over time. However, this is for the general understanding, there are other options and stipulations in arranging a CHIP mortgage product and it is best to talk to your broker to get more details.
HOW DOES REVERSE MORTGAGE WORKS?
A reverse mortgage is an excellent option when the homeowner wants to live in their home but may not want or have the possibility to make scheduled mortgage payments. As people age, they want to enjoy the equity of their home early but want to have more cash flow. They can choose the mode of payment or no payment at all. They can either take the amount in a single stretch or in equated monthly installments or even quarterly. This enables the enjoyment of one’s retirement life comfortably on the basis of keeping the property ownership. On the other end, however, some people chose to make payments during the year because they want to preserve some of the equity in the end.
We find that more and more adult homeowners find it hard to afford their mortgage payments. With the utilities costs alone and with property taxes and cost of living, they find it financially stressful and opt for CHIP Reverse Mortgage.
When a person opts for a reverse mortgage plan the lender will come forward and advance the amount requested by the person. This is because it depends on the age of the homeowner and the location area the property is located in. For example, the owner that is 80 years old and resides in the GTA area, will be able to borrow more than a 55-year-old residing in the city or suburbs. This is because the life expectancy of 80 years old is much less than the 55 and therefore will use up less equity in the home. It is up to the borrower to decide to collect the money in one shot or through regular monthly installments. This is probably the best of the 2 since you would only get charged on the amount you use. When the loan is due, as long as the homeowner remains in the property, they can choose another term and or renegotiate the term. When the term is due, you may opt out of it or simply continue. The home owner is only required to pay the property taxes annually and the utility bills associated with the home.
LET’S LOOK AT HOW A CHIP REVERSE MORTGAGE PLAN WITH A CLEAR REVERSE MORTGAGE EXAMPLE:
Suppose you own a home that is worth $500,000
And you take a loan amount of $200000
At an interest rate of 5.5%
Annual Interest rate works out to $11,000
And at the end of the first year, your mortgage amount increases to $211,000
And at the end of the first year, your equity amount will decrease to $289,000
It is important to note that this is only for illustration purpose and other options are available to preserve the equity.
BENEFITS OF A CHIP REVERSE MORTGAGE
Tax-free- you receive the money tax-free. It is not added to your taxable income so it doesn’t affect Old Age Security (OAS) or Guaranteed Income Supplement (GIS) government benefits you may receive.
You can use the money the way you wish. Maybe you want to enjoy your retirement or cover unexpected expenses. Perhaps you want to update your home or help your family without depleting your current savings. The only condition is that any outstanding loans (e.g. existing mortgage or home equity line of credit) secured by your home must be paid out with the proceeds from your CHIP Reverse Mortgage.
No regular mortgage payments are required while you or your spouse live in your home. The full amount only becomes due when you and your spouse no longer live in the home
You maintain ownership and control of your home. You will never be asked to move or sell to repay your CHIP Reverse Mortgage. All that’s required is that you maintain your property and stay up-to-date with property taxes, fire insurance and condominium or maintenance fees while you live there.
You keep all the equity remaining in your home. In many years of experience, 99 out of 100 homeowners have money left over when their CHIP Reverse Mortgage is repaid. And on average, the amount left over is 50% of the value of the home when it is sold.
FREQUENTLY ASKED QUESTIONS
Got questions? Here are frequently asked questions.
How does a CHIP Reverse Mortgage work?
A CHIP Reverse Mortgage is secured by the equity in your home. Unlike a traditional mortgage in which you make regular payments to someone else, a reverse mortgage pays you. The big advantage with the CHIP Reverse Mortgage is that you do not have to make any regular mortgage payments for as long as you or your spouse live in your home. That’s what has made reverse mortgages such a popular solution in Canada, the U.K., the U.S., Australia and other countries.
Who is it for?
The CHIP Reverse Mortgage is designed exclusively for homeowners age 55 and older. This age qualification applies to both you and your spouse.
It’s for the home owner that wants to live in their home and want or need to use a portion of their home equity. Some of the cases may be to help themselves or family.
“As a parent or grandparent it’s natural to want to help our children and grandchildren who may be facing financial challenges such as finding full-time employment or paying their day- to-day expenses,”
How much can I get and how is it calculated?
You can receive up to 55% of the value of your home. The specific amount is based on your age and that of your spouse, the location and type of home you have, and your home’s current appraised value. You can contact me and I can quickly give you an estimate of how much you may be approved for.
Recently, banks are coming up for a potential alternative to a loan increase in addition to the maximum allowed at this time. Therefore, it is possible to borrow more money than the stated chart below. There are other concessions that the bank will make. It is important that you discuss it with a professionally certified CHIP mortgage to get the full details.
Here is a general guideline of the money you could potentially borrow:
How do I receive the money?
You can choose how you want to receive the money. The CHIP Reverse Mortgage gives you the option of receiving all the money you’re eligible for in one lump sum advance, or you can take some now and more later, or you can receive planned advances over a set period of time. Planned advances are available on the Income Advantage product.
Will the homeowner owe more than the house is worth?
The homeowner keeps all the equity remaining in the home. In our many years of experience, over 99% of homeowners have money left over when their loan is repaid. The equity remaining depends on the amount borrowed, the value of the home, and the amount of time that’s passed since the reverse mortgage was taken out.
Will the bank own the home?
No. The homeowner retains title and maintains ownership of the home. It’s required for the homeowner to live in the home, pay taxes on time, have property insurance, and maintain the property in good condition.
What if the homeowner has an existing mortgage?
Many of our clients use a reverse mortgage to pay off their existing mortgage and debts.
Should reverse mortgages only be considered as a loan of last resort?
No. Many financial professionals recommend a reverse mortgage to supplement monthly income instead of selling and downsizing, or taking out a conventional mortgage or a line of credit.
What fees are associated with a reverse mortgage?
At the time of the origination transaction., there will be some costs. At the end of the transaction, there will be legal costs and a fee from the Chip Reverse Mortgage bank. The fees will all be disclosed to you at the time of the approval. The only upfront fee will be for an appraisal,. The other fees will be : Independent legal advice as well as our fee for administration, title insurance, and registration. With the exception of the appraisal fee, these fees are paid for with the funding dollars. The borrower may chose to pay for the legal costs out of their own pocket if they wish. This is a matter of preference.
What if the homeowner can’t afford payments?
There are no monthly payments required in a CHIP revers mortgage program as long as the homeowner is living in the home.
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“I had the opportunity to work with Lucia in the search for my first home’s mortgage. That was a pleasant experience. Lucia was very informative throughout the whole process with numbers that make sense. She advised us on different scenarios, different approaches for the best results. I feel very comfortable to make my own decision based on Lucia’s advice to look for the mortgage that best suited my situation. i definitely recommend Lucia’s service to assist in your search for the new home. Paul Dinh”
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