The loan that’s right for you
Things to consider when evaluating a home secured line of credit option
When it comes to loans, one size does not fit all. And if you are over 55 and own your own home, there are some things about a typical home secured line of credit loan that you should be aware of before you sign on the dotted line.
First, with a home secured line of credit, you have to be able to make regular payments, starting as soon as you get the loan, which could be a problem if you’re on a fixed or limited income.
Second, when interest rates go up, as they inevitably will, you will have to pay more to finance the loan. You have to be able afford the additional costs that will come with rising interest rates.
Third, you can be asked to repay the loan at any time for any reason. In other words, if your bank changes their lending policies or your financial situation changes by marriage breakdown, the death of a spouse, bad credit, or loss of income, you could lose access to money, just when you need it most.
If you are concerned about any of these issues (e.g., making regular payments, rising interest rates, or being forced to pay back the loan before you’re ready), you may want to join the thousands of Canadians who are seeking the freedom and security of a reverse mortgage as an alternative.
Understanding a reverse mortgage alternative
In Canada, a reverse mortgage is known as a CHIP Home Income Plan, and is available through HomEquity Bank.
Common in Great Britain, the United States and Australia, reverse mortgages are steadily growing in popularity among Canadians looking for a financial solution that’s safe and predictable, no matter what life throws at them.
What makes them so attractive is that unlike traditional loans, with a CHIP Home Income Plan you don’t have to make any payments until you decide to move or sell your home. Of course, you always have the option of making regular payments if you want to, but you are under no obligation to do so.
Instead, the interest simply compounds on the outstanding balance of the reverse mortgage while the entire value of your home also continues to appreciate. Then, when you do sell your house or move, you simply pay off the accumulated amount of the loan and keep the rest. That’s a huge plus for anyone who is on a fixed or limited income.
With a reverse mortgage you also are somewhat protected from unexpected jumps in interest rates because no matter how high rates go, you still don’t have to make any payments until you choose to move or sell. That’s means you never have to worry about not being able to afford the loan if rates go up.
The CHIP Home Income Plan is also an excellent way to supplement your income on an ongoing basis. You can choose to access a fixed amount each month. Or you can take out a lump sum and use it to build an investment portfolio that will generate extra cash flow.
And finally, unlike a home secured line of credit, you never have to worry about having to repay the loan until you choose to move or sell, regardless of your income or cash flow.
Reverse mortgage borrowing options
With a reverse mortgage, you can borrow up to 50% of the value in your home. This 50% limit protects the equity in your home and helps ensure that there’s still significant value in your home even after the loan is repaid.
In fact, most people who get a CHIP Home Income Plan still have more than 50% equity in their home when they sell. That’s good news for people who want to have some money to give to their heirs or for the next stage of their retirement.
A reverse mortgage offers several other benefits, including:
• You can borrow $100,000, $200,000, $300,000 or more (depending upon the value of your home).
• You make NO payments until you decide to move or sell (unless you want to).
• You always keep complete and total control of your home at all times.
• The money you receive is tax-free.
Weighing your options
Today Canadians are living longer, saving less, and spending more than ever before. This, combined with more limited income earning opportunities, means homeowners over 55 need solutions that are predictable, no matter what life throws at them. A home secured line of credit may be an effective short-term borrowing option if you can support the interest payments and have a plan to pay off the loan. They are not without risks, however, and the loan can be cancelled at any time. Alternatively, the interest rate premium charged on reverse mortgages provides Canadians with a way to unlock their home equity without having to assume monthly payments, or worry about rising interest rates. It also affords them the flexibility to repay the principal and interest when they choose to.