Older Canadians struggling with debt might want to canvas the merits of obtaining a CHIP reverse mortgage.
For some older Canadians the silver bullet for eliminating their debt might be a CHIP reverse mortgage. A CHIP reverse mortgage enables Canadian homeowners at least 55 years of age to tap into the equity in their home to raise tax free cash. This money can be used to pay off debts or for other purposes.
CHIP is an acronym for Canadian Home Ownership Income Plan. It is a mortgage where the borrower is not required to make any payments.
CHIP reverse mortgages available to Canadians are superior to reverse mortgages offered in the United States where reverse mortgages do not have a good reputation.
1. Eligibility
Canadian homeowners who are a minimum of 55 years of age are eligible for a CHIP reverse mortgage.
If you have a spouse then both of you must be at least 55 years of age.
2. Qualifying for a CHIP reverse mortgage with a lender
Not everyone who is eligible for a CHIP reverse mortgage is going to qualify for a CHIP reverse mortgage with a particular lender.
In determining whether or not you will qualify for a CHIP reverse mortgage a lender will consider the following factors:
The age of you and your spouse
The geographic location of your home
The type of home that you own (detached, semi-detached, townhouse et cetera)
The appraised value of your home
Your home equity
The condition of your property
3. How much can you borrow with a CHIP reverse mortgage?
Under a CHIP reverse mortgage you might be entitled to borrow as much as 55 percent of the equity in your home.
The age of the homeowners is a key variable in determining what percentage of their equity they can borrow under a CHIP reverse mortgage. The older the homeowner, the the greater the percentage of their equity they can borrow. Conversely, the younger the homeowners, the smaller the percentage of their equity that can be borrowed.
4. How a CHIP reverse mortgage works
When you obtain a CHIP reverse mortgage the first thing your lender is going to do its to pay off any existing mortgages as well as any liens on the property.
The homeowner retains ownership of the property and is free to sell it.
Provided the home is not sold, the lender will not call the loan as long as the surviving spouse, lives in the home, pays the property taxes and the insurance, and maintains the property.
5. CHIP reverse mortgage functions like a line of credit
A CHIP reverse mortgage functions like a line of credit.
The homeowner can borrow a lump sum, a monthly draw, or both.
Interest will be charged on monies borrowed by the homeowner.
While the homeowner has the option of making payments on a CHIP reverse mortgage, the homeowner is not required to make any payments on the mortgage.
6. Guarantee that no one will owe more than the value of the home
Under a CHIP reverse mortgage the lender guarantees that no one will owe more money than the value of the home.
This includes the homeowner, the homeowner's surviving spouse, as well as their heirs.
7. Advantages of a CHIP reverse mortgage
CHIP reverse mortgages have several advantages.
It permits homeowners with poor credit or limited income to borrow money.
2. The borrower receives the monies tax free.
In contrast, a homeowner will have to pay income tax if they were to liquidate some of their other investments.
3. It allows homeowners to take advantage of gains in real estate values without selling their home and incurring the costs associated with a sale.
4. It enables homeowners to live in their homes longer.
5. It does not impact an individual's government benefits such as Canada Pension Plan, Old Age Security, or the Guaranteed Income Supplement.
6. It provides the borrower with a pool of money to pay their creditors.
7. It provides the borrower with a pool of money to fund settlements.
The homeowner can use the borrowed funds when negotiating one-time lump sum
payments to their creditors for significantly less than the current outstanding balance
as settlement in full.
8. It is a risk-free debt relief option.
Using a CHIP reverse mortgage to pay off debts is a risk-free debt relief option.
8. Disadvantages of a CHIP reverse mortgage
A CHIP reverse mortgage does have some disadvantages.
As a result of higher closing costs and higher interest rates a CHIP reverse mortgage will likely be more expensive than a conventional mortgage or a home equity line of credit.
Having said that, many individuals over 55 years of age may not be able to qualify for a conventional mortgage or home equity line of credit.
9. CHIP reverse mortgage VERSUS a Home Equity Line of Credit
From the perspective of eliminating debt, a CHIP reverse mortgage has a number of advantages compared with a conventional home equity line of credit.
If you were to obtain a home equity line of credit you would be required to make monthly payments.
In contrast, under a CHIP reverse mortgage no payments are required.
If you were to obtain a home equity line of credit there is a risk that your loan would be called or not renewed.
In contrast, under a CHIP reverse mortgage your loan will not be called provided you do not sell your home, and you--or your surviving spouse--continue living in the home, and you pay the property taxes and house insurance, and maintain the property.
10. CHIP reverse mortgage VERSUS a Consumer Proposal
Under a Consumer Proposal an individual will repay a percentage of their indebtedness to their unsecured creditors in monthly installments over a period not to exceed five years.
A Consumer Proposal is only available for insolvent individuals.
You are insolvent if your total debts exceed your total assets.
A Consumer Proposal might not be attractive in three scenarios.
Firstly, where the homeowner has significant equity in their home. The more equity that a consumer has in their home the more they are going to have to repay to their creditors in a consumer proposal.
Secondly, those with limited incomes might not be able to afford to make their monthly installment payments required under a Consumer Proposal.
Finally, a Consumer Proposal is not a risk-free debt relief option.
If an individual becomes more than 90 days in arrears making their monthly payments under a Consumer Proposal then it is automatically terminated.
This means that a person making a Consumer Proposal runs the risk that he or she will not be able to successfully eliminate their debt.
I review the merits of eliminating debt by obtaining a CHIP reverse mortgage in a YouTube video titled "Can You Get out of Debt With a CHIP Reverse Mortgage?".
In this YouTube video former collection agency lawyer and author Mark Silverthorn explains why obtaining a CHIP Reverse Mortgage might be the silver bullet for older Canadians getting out of debt.
For some older Canadian homeowners a CHIP reverse mortgage might be an ideal solution for them to pay of their debts.
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