Help for seniors

HomEquity Bank, operator of the Canadian Home Income Plan reverse mortgage, better known as CHIP, has a monopoly today but mortgage experts say it’s only a matter of time before competitors move into this highly lucrative and growing market.

“I can’t predict when it might happen but I know there are people looking into this space,” says Robert McLister, a mortgage specialist with brokerage firm Mortgage Architects in Vancouver and co-founder of MortgageTrends.com.

“There is a lot of money being left on the table. When you see CHIP’s growth numbers, they are just phenomenal. The upside is when you have no better options, [reverse mortgages] are a simple way to extract the necessary cash from your house. There is no application process, there is no proof of income. There are no mortgage payments that need to be made.”

Through the CHIP program, launched in 1986, homeowners over the age of 60 can receive a tax-free lump-sum payment or monthly payments of anywhere between 10% and 40% of the equity they have in their home.

According to the Canadian Mortgage and Housing Corp., it is modelled on similar programs in the United Kingdom and United States, and it is treated as a loan that is registered as a lien against the property.

That loan is currently subject to a 4.75% interest rate. “Compare that to 3.5% line of credit rate, and there is a big interest spread,” Mr. McLister says.

Still, it can represent a financial lifeline for homeowners in need of additional cash to pay off bills. The first RBC Retirement Myths and Realities survey released last year found that 39% of retirees had debt when they retired and more than one-quarter of retirees or pre-retirees have acquired or expect to take on further debt.

Greg Bandler, senior vice-president at HomEquity Bank, says the rise in the number of homeowners signing on to the CHIP program is partly a result of changing attitudes about retirement: “What is important in retirement? Good health, living life the way I envisioned and having enough money.

” We are definitely seeing that among our clientele. The reality is that property has undergone tremendous appreciation and is an important asset within their total portfolio and net worth, but it is an asset that is very illiquid.

“On the emotional side of the ledger, they are very attached to the house and want to live there. The alternatives are not great. If you want to downsize and move to a smaller place, you are realizing the appreciated value, but you are also buying in today’s market with today’s dollars.”

HomEquity requires an independent appraisal of the property to be involved in the CHIP program, which Mr. Bandler says will cost anywhere from $175 to $300, depending on the location. Legal, closing and administrative costs will total $1,495. These items can be deducted from proceeds of the reverse mortgage.

Applicants are also advised to seek independent legal advice, which Mr. Bandler says typically costs anywhere from $300 to $600: “We want to make sure that the seniors and heirs understand fully what their obligations are and how the contract works. We want to avoid buyer remorse.”

Gary Siegle, a Calgarybased regional manager with Invis, a national independent brokerage firm, says the market is going to grow because there are a lot of people who have not planned appropriately for retirement.

“It wouldn’t be a shock to me to find that there are some people in boardrooms somewhere in this country looking and studying reverse mortgages and saying, ‘This is going to be a ballooning market and we need to get a piece of it.’ That is part of the reason that the HomEquity Bank is trying to continue to sharpen their pencils and make the product as attractive as possible.

“Even though they don’t have competition in the market today, they could face competition someplace in the next few years.

“I have spent a lot of time and effort over the last few years on my house and my yard and I don’t want to move either. I can certainly empathize with all of the reasons why you might want to take advantage of this program.”