HomEquity Bank CHIP Home Income Plan HELOC Comparison - Reverse Mortgages

The HomEquity Bank site makes this statement : Why A Home Equity Line Of Credit May NOT Be Your Best Choice, and   If You’re A Canadian Homeowner, 55+, A Reverse Mortgage May Be Better Than A Home Equity Loan.  (Much, Much Better!)

They go one to explain why (see italics below) - we have added some counter thoughts (blue text).

"A Reverse What?
A reverse mortgage is a loan, created especially to allow homeowners 55 or over, to access the equity in their home, without having to sell or move. In many cases, it’s a better option than a traditional Home Equity Line of Credit (HELOC). Here’s why!"

www.investing101.ca: A Home Equity Line of Credit (HELOC) does not require you to sell or move either.  So is this a scare tactic by the HomEquity Bank advertisers /spin-doctors to scare seniors toward their product?)

"No Regular Payments
When you borrow through a home equity line of credit (HELOC), you have to make regular payments (with interest) often for a very long time, which may be hard to do on a fixed or limited income. With a reverse mortgage, such as the CHIP Home Income Plan, you can make regular payments, if you so choose - but you don’t have to."

www.investing101.ca: HELOC's require minimum regular payments of the interest but not the principal (unless you want to) and so a HELOC is a better, more-flexible option.  Ironically, it is the "no regular payments" of the CHIP product that will but you in debt for a very long time.  HomEquity Bank advertisers / spin-doctors are having it both ways : its bad to have regular payments on a HELOC, but hey, they offer that too.  If it's so bad to pay off part of your loan, why do they offer that too?)

"You can stay in your home as long as you want. With a Home Equity Loan, if anything changes tied to your financial situation, you could be forced to sell your home to pay off the loan. With a CHIP Home Income Plan, you can never be forced to sell or move. Ever."

www.investing101.ca: if you only borrow what you can afford to repay the interest on, being forced to sell to pay off a HELOC is unlikely.  But if rates rise and you are squeezed paying the HELOC interest, why not consider the CHIP plan then?  Not now.  After all HomEquity Bank suggests that you use their product to pay off loans - there is no reason you could not pay off your HELOC (which unlike the CHIP reverse mortgage, didn't balloon in compound interest debt in the early years).  Also consider other possibilities, like life insurance payouts if one partner passes on - those can be used to pay off the HELOC or part of it.

"No Credit Check
Qualifying for a Home Equity Loan usually requires undergoing a rigorous credit check and meeting certain income qualifications. There are no credit checks or income qualifications required for the CHIP Home Income Plan."

www.investing101.ca: apply for your HELOC before you retire so you can quality more readily when you are earning income.  Yes, that means planning ahead which is great thing to do for your financial planning.  Also, if you are rejected due to poor credit score, maybe you can't really afford to be borrowing?  You could consider downsizing to free up equity with no strings attached, instead of borrowing with CHIP)

"Get the Money you Need
With Home Equity Loans, often you can’t get the amount of money you really need.
With a reverse mortgage, like the CHIP Home Income Plan, you can borrow up to 50% of the value in your home."

www.investing101.ca: again, apply for your HELOC before you retire so you can quality more readily when you are earning income.)

So don't rush into a CHIP reverse mortgage unless you have considered the options.  Get some independent advice first.  The HomEquity Bank promotional material does not provide a fair, balanced view of the HELOC alternative.  The CHIP product may be OK for some, but many people will have other options.

For more information:

  • learn about HomEquity Bank CHIP Home Income Plan at www.chip.ca
  • alternatively Alt Mortgages provides information at ReverseMortgages.ca
Alt Mortgages appears to be open to products besides CHIP and may be worth a look:

"By using ReverseMortgages.ca, you become our client, which entitles you to our unbiased advice. Since there is no “cookie cutter” mortgage solution, we conduct a needs analysis when you call us to determine if a reverse mortgage (i.e., CHIP) is right for you. Only then will we start an application for you with a reverse mortgage lender. In the event that we discover you would be better suited for an alternative mortgage product (like a HELOC), we will advise you on the appropriate next steps to take. If we determine that your current mortgage product is the best option for you, we will not try to get you to switch mortgage lenders."

Tax Deductions - Income & Small Business Tax Deductions, Students

George Harrison wrote "There's one for you, nineteen for me" in his song Taxman.  If you want a greater portion of you income than George's 5%, then here are some tax deductions you should remember not to forget.

Small Business Tax Deductions

  • A portion of your mortgage interest for your home office
  • A percentage of your property taxes for your home office
  • GST on business purchases
George: "Now my advice for those who die,
 declare the pennies on your eyes!"
Student Tax Deductions
  • Daycare & summer camp fees if your spouse is working
  • Tuition, book, bus pass and related fees
  • RRSP contributions
  • Moving costs for relocating to attend school
Income Tax Deductions (Personal)
  •  Disability tax credits for prolonged infirmities, like hearing impairments certified by an audiologist
  • Interest on loans for investments
  • The cost of renting out a safety deposit box
  • Moving expenses (to move closer to work) - including the cost of breaking a lease

CI Guaranteed Retirement Mutual Fund - REIT and MIC Comparison for DIY Investors

The last post compared CI Investments G5|20 mutual fund to a lowly GIC and found that for the flat market scenario, a GIC could actually outperform the fund!

For background, the CI Guaranteed Retirement Cash Flow Series offers 5% cash flows for 20 years,  tax-efficient cash flows for non-registered accounts (outside your RRSP, TFSA, etc.), and the ability to participate in rising bull markets.  But there are other options to achieve steady, higher income beyond the super-safe GIC option.

Here we compare the fund to a REIT and the rising market scenario below (#1 , the golden yellow path):

Lets say the market goes up in the first 5 years at 6% per year compounded and consider $20,000 invested.  From year 6 (the first year of guaranteed returns), you could take out $1,262 a year for 20 years to deplete the funds that started at $25,250. See the chart to the left.

Alternatively, you could invest in a REIT, like Centurion Apartment REIT, and earn about 7.5% (that does not count capital appreciation).  In that case you could withdraw $1,873 a year - that's 48% more cash flow a year than the CI scenario #1 !

REIT distributions can also be tax-efficient return of capital, just the the CI mutual fund.  But the REIT's higher earnings mean the principal is not depleted so quickly and can pay out more.  Earning about 7.5% with the REIT and having inflation protection through capital appreciation of the underlying real estate means there are other options to the CI Investments G5|20 mutual fund that you could consider.

If you invest in a publically traded Mortgage Investment Corporation, a MIC, you could invest less than the REIT minimum amount, have good liquidity (just like the mutual fund), and earn even more than this REIT example.

Timbercreek Mortgage Investment (TMC on the TSX) distributes about 8.5% - it does not have the tax advantages of REIT distributions but in a registered RRSP or TFSA account that would not matter.  You could withdraw $2,928 per year from the MIC account - that's 132% more than the CI mutual fund.

This shows how critical extra percentages are in earnings over the long term.  No doubt the mutual fund fees eat into the CI fund return, setting it back in it's cash flow potential compared to other DIY investing products like the REIT or the MIC.

CI G5|20 Mutual Fund Retirement Cash Flow Review - GIC Comparison

CI Investments has introduced CI Guaranteed Retirement Cash Flow Series - a unique mutual fund that offers the following:
  • 5% cash flows for 20 years (guaranteed by Bank of Montreal).
  • Flexibility to provide downside protection in bear markets and take advantage of opportunities in bull markets.
  • A low volatility investment strategy.
  • Tax-efficient cash flows for non-registered accounts (payments as "return of capital")

But what are the downside considerations?  Are there better alternatives to manage investment risk and achieve stable cash flows in retirement?  First, here are the scenarios to consider:


You can't argue that the downturn protection is nice to have in scenario 3.  But is getting all your funds back (5% in each of 20 years after the first 5 years) all that great?  Consider $20,000 invested -you could earn 3% a year in the first 5 years in a GIC - compounded that means that after year 5 you have $23,185 to start.  As the funds grow you have the potential to get more than your original 5% back each year with the GIC, $1513 per year to be exact.

Or you can withdraw $1000 and have a load of cash left over.  In the chart at right, you would have over $14,000 left over sticking with a GIC instead.

The thing to remember is that with inflation, getting 5% of your principal investment back in year 25 is really only worth 3% in terms of future buying power.  You really need options that continue to grow over the 20 years to have meaningful cash flow that lasts!






CHIP Home Income Plan Interest Comparison - DIY Borrow and Invest Instead and Save!


CHIP Home Income Plan interest rates are posted in a brochure available to prospective borrows.

Current interest rates and costs vary from 6 month, 5 year and variable borrowing options.  Compare the high CHIP variable rate of 4.75% with the ratesupermarket.ca low rate of 2.35% from Mortgage Emporium.  On the example for illustration purposes of a $150,000 loan, you could save 2.45% or $3675 a year by borrowing on your own.

How about a 5 year term?  CHIP charges you 5.79% interest on your loan vs. 2.99% for a Meridian loan. That's a $4200 savings by borrowing on your own!

Why not borrow against your home equity and invest in a REIT instead of earning nothing from the CHIP loan.  Skyline Commercial REIT pays a 9% distribution - that's $13,500 of tax-free income a year from a $150,000 loan and investment.  You could use that income to pay off the home equity loan (instead of having it grow and grow as some CHIP customers do), and have income left over!


Canadian Home Income Plan Alternative - CHIP Alternative

You have seen the CHIP ads.  Seniors hungry for cash flow can take some equity out of their home with the Canadian Home Income Plan from HomEquity Bank - a reverse mortgage loan.

The hook is undeniable "Stay in your home. Remain independent. Maintain your financial freedom. Enjoy your money now, you deserve it!"

The problem with the program is that it lends seniors at above-market lending rates - that interest has to be paid back when the homeowner sells the home.  Financial planners have pointed out that interest costs can accumulate rapidly, compounding twice a year, greatly eating into home equity and bloating the loan value
.

An alternative?  Borrow to invest in something that pays back the interest and has something left over.  Instead of borrowing with a reverse mortgage and paying about 5.45% interest with CHIP's 5 year rate, why not borrow with a traditional home equity loan / mortgage at 3% interest and invest it - say, earning about 7.5% in something like Centurion Apartment REIT?  On top of that, your investment grows each year with appreciation of the real estate you are investing in with the REIT.

REITs like Centurion pay you earnings regularly.  These distributions are 'tax efficient' - classified as return of capital, meaning they do not count as income that would affect pension benefits (just like the CHIP loan).  In contrast to CHIP, you can pay off and deduct your interest costs instead of having them compound and eat into your home equity.

Like other chips, CHIP loans offer some instant gratification - but working off the long term debt from borrowing at high rates with compounded interest could upset otherwise healthy retirement financial plans.

2014 Tax Season Tips - TFSA Limits, RRSP Limits, Prescribed Interest Rates

Here are some reminders to keep you on track for tax filing this year:

2014 TFSA limit is $5,500
The Tax Free Savings Account (TFSA) contribution limit is $5,500 for 2014.  It was increased in 2013 from $5,000 in previous years starting back in 2009. You have to be 18 or over and unused contribution room can be carried forward.  TIP: you can contribute funds given to you by your spouse or common-law partner with no attribution of income back to the spouse/ partner. Tax free savings are a terrible thing to waste!

Any withdrawal restores the contribution limit for that amount - you can cannot re-contribute this until the following calendar year!  TIP: make any withdrawal close to the end of the year so you can have restore the contribution room sooner.

2014 RRSP and Pension Limits
The RRSP contribution limits increase to $24,270 in 2014 an
d to $24,930 in 2015. It was $23,820 in 2013.

Prescribed Interest Rates 2013 and For First Quarter 2014
The prescribed interest rates for the first calendar quarter of 2014 will drop 1%:

  • The interest rate charged on overdue taxes, Canada Pension Plan contributions, and Employment Insurance premiums will be 5%. TIP: don't file late!
  • The interest rate paid on overpayments will be 3%. TIP: don't overpay! Wait, comparing this to short term savings rates, maybe it is OK to overpay to earn 3%? This is only for corporate taxes.
  • The interest rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans will be 1%.
The prescribed rates for the fourth quarter of 2013 are as follows:
  • The interest rate charged on overdue taxes, Canada Pension Plan contributions, and Employment Insurance premiums will be 6%.
  • The interest rate paid on overpayments will be 4%.
  • The interest rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans will be 2%.
  • The first, second and third calendar quarters of 2013 were as follows:
  • The interest rate charged on overdue taxes, Canada Pension Plan contributions, and Employment Insurance premiums was 5%.
  • The interest rate paid on overpayments was 3%.
  • The interest rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans was 1%

CareVest MIC alternative Timbercreek Mortgage Investment Corporation

Looking for an alternative to CareVest MIC? We recently completed our redemption / retraction of CareVest shares and are looking for an investment in the same space - here is what we found.

Timbercreek Mortgage Investment Corporation trades on the TSX under TMC.  This MIC invests in a diversified pool of high quality mortgage loans attractive yields that are directly secured by residential (including multi-residential), office, retail and industrial real estate properties across Canada.  The current yield is 8.5% - this is after increasing the distribution from 6.3 to 6.7 cents per share last November.

Avenue Investment's Paul Gardner commented last week "The shares have been depressed due to selling of shares by financial advisers that no longer receive a trailer commission since they (TMC) now are a corporate entity and not a closed end fund."  See chart below.

TMC - traditionally a stable, low-beta stock - is definitely oversold now - it boasts attractive, stable monthly distributions, strong and improving fundamentals and liquidity that you cannot get in other locked-in MIC products.

But the strong fundamentals have not changed for Timbercreek Mortgage Investment Corporation. For example as of Q3 last year:
  • Net mortgage investments were up 43% year over year to $392.8 million
  • The Company advanced 13 new mortgage investments, received full repayments on 10 mortgage investments and partial pay downs totaling $52.8 million, resulting in net mortgage investments of $392.8 million as of September 30, 2013.
  • The weighted average interest rate earned on the mortgage investments at September 30, 2013 increased year over year to 6.71%.
  • The weighted average term to maturity was 2.4 years so that about 80% of mortgage investments mature by December 31, 2015, or earlier.  No need to worry if rates go up because with these short lending terms TMC can quickly cycle into lending at higher rates.
The portfolio continues to be well diversified across Canada's largest provinces as follows: Ontario (59.7%), Quebec (16.8%), Alberta (11.9%) and B.C. (6.6%), and the loan-to-value on the mortgage portfolio at September 30, 2013 was 45.1% - this is well below the 70% loan-to-value limit in the Company's asset allocation model.  This is significantly lower than some of the CareVest products.  More importantly, compared to CareVest, during the period, no mortgage investments were in default and as a result management has determined that no provision for mortgage losses is required for the Period.

"We continue to take a very conservative approach when it comes to managing the Company and are focused primarily on lending against properties where we are comfortable that there is adequate income to service the debt - rather than land and construction," states Andrew Jones, Managing Director, Debt Investments of Timbercreek Asset Management Inc., the manager of the Company. He adds that 100% of the portfolio is focused in first mortgages and over 91% of mortgages in the portfolio are secured by income-producing properties - this helps investors sleep at night.

TMC shares are up 3% this week on high volumes as investors recognize the value in this MIC and as the shares recover from the "financial advisor" sell off.  But since it is still well below recent highs ($10.93 in June 2011), you could see some nice appreciation in the short term, on top of the steady yield.


TMC could climb back up to the highs of 2010, 2011, 2012 and 2013 since the fundamentals are the same.


H & R Block Tax Software Activation Codes

H & R Block has free tax preparation software available for download or for pick-up free at Canada Post.

"Every Canadian can prepare and file a tax return for free, with no restrictions. It’s free, regardless of income, job, age, whether you’re a student or retiree, or have a simple or complex tax return."

Although there is a limit of 1 tax return, Canada Post will let you pick up as many copies of the software as you need.  Below are some free authorization codes you can use to authorize your software (I picked up a few extra copies!).

H&R Block tax software activation codes (first come first serve):

USXE-9CBQ-9917-4W6K

6JSX-V4UT-455C-T9V2

44TW-RSN1-SG7T-R6HY



Best GIC Rates for RRSP TFSA and RIFF Accounts

Outlook Financial edges out the competition with the best rates for RRSP, TFSA and RIFF accounts for 'virtual banking'.  The OutlookFinancial.com website indicates "..services are delivered through the convenient technology you have at your fingertips: telephone, Internet, ATMs and Canada Post."  So, unlike traditional banks with the branch 'bricks and mortar' overhead costs, this division of Assiniboine Credit Union can pass those cost savings onto you with better rates.

Your deposits are also guaranteed:  "...all your Outlook Financial deposits and interest are 100% guaranteed – without limit – by the Deposit Guarantee Corporation of Manitoba (DGCM). As established under The Credit Unions and Caisses Populaires Act, DGCM is required by law to guarantee, without limit, all your deposits at a Manitoba credit union."

Here are the rates effective Jan 31, 2014:


Best RESP GIC Rates

If you want to earn a great GIC rate in an RESP then try one of the many institutions that sell GICs as term deposits at Questrade.  Here is a current list of what interest rate you can earn on 1 to 5 year deposits from the 'bonds bulletin'.
                                      

Institution1 year2 year3 year4 year5 year

B2B Bank
1.451.71.952.32.5
Bank of Nova Scotia Ag1.431.561.862.162.46
Equitable Bank1.41.811.952.22.5
HSBC Bank Canada Agt. S1.151.451.651.92.05
HSBC Mortgage Corp. Agt1.151.451.651.92.05
HSBC Trust Agent Servic1.151.451.651.92.05
Hollis Canadian Bank1.431.561.862.162.46
Home Trust Company1.651.852.12.352.6
ICICI Bank Canada1.31.511.822.082.37
MCAN Mortgage Corp.1.451.652.052.352.4
Manulife Bank1.461.651.952.32.6
Manulife Trust1.461.651.952.32.6
Montreal Trust Agt. Ser1.431.561.862.162.46
NatCan Trust Agent Ser.1.41.551.82.152.45
National Bank Agent Ser1.41.551.82.152.45
National Trust Agent S.1.431.561.862.162.46
Royal Bank-1.51.61.912.23

These are annually compounding, non-redeemable deposits with interest payable at maturity. Annual compounding options with lower rates are also available.  Cashable after 30 day GICs with 1 year terms options are available from 6 institutions.

Orders are made over the phone with a $1000 minimum.  These are purchased just like bonds are, so you will be talking to the bond trading desk.

Shorter terms are also available.  Home Trust offers these best short term rates:

30 day deposit     1.25 %
60 day deposit     1.3 %
90 day deposit     1.35 %
120 day deposit   1.5 %
180 day deposit   1.6 %
270 day deposit   1.66 %