diff --git a/src/components/chips/js/chipsDirective.js b/src/components/chips/js/chipsDirective.js
index f4c83431dbe..62c0c402145 100644
--- a/src/components/chips/js/chipsDirective.js
+++ b/src/components/chips/js/chipsDirective.js
@@ -246,10 +246,12 @@
       var userTemplate = attr['$mdUserTemplate'];
       attr['$mdUserTemplate'] = null;
 
+      var chipTemplate = getTemplateByQuery('md-chips>md-chip-template');
+
       // Set the chip remove, chip contents and chip input templates. The link function will put
       // them on the scope for transclusion later.
       var chipRemoveTemplate   = getTemplateByQuery('md-chips>*[md-chip-remove]') || templates.remove,
-          chipContentsTemplate = getTemplateByQuery('md-chips>md-chip-template') || templates.default,
+          chipContentsTemplate = chipTemplate || templates.default,
           chipInputTemplate    = getTemplateByQuery('md-chips>md-autocomplete')
               || getTemplateByQuery('md-chips>input')
               || templates.input,
@@ -274,6 +276,11 @@
 
         $mdTheming(element);
         var mdChipsCtrl = controllers[0];
+        if(chipTemplate) {
+          // Chip editing functionality assumes we are using the default chip template.
+          mdChipsCtrl.enableChipEdit = false;
+        }
+
         mdChipsCtrl.chipContentsTemplate = chipContentsTemplate;
         mdChipsCtrl.chipRemoveTemplate   = chipRemoveTemplate;
         mdChipsCtrl.chipInputTemplate    = chipInputTemplate;