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.