Reverse Mortgages in Canada: How They Work

A reverse mortgage, Canada's option for homeowners who are typically 55 or older, lets them borrow against home equity without making regular payments. The loan is repaid when the home is sold, or when the borrower moves out or passes away. Because interest compounds and no payments are made along the way, the balance grows over time and can consume a large share of the equity. It is a product for a specific situation, not a general solution.

What a reverse mortgage is

Unlike a traditional mortgage, a reverse mortgage does not require you to pay down the principal during the term. Instead, the lender advances you money, either as a lump sum, a series of payments, or a credit line, and the interest is added to the balance. You keep title to the home and continue to live in it, and you remain responsible for property taxes, insurance, and maintenance. The debt is settled from the sale of the home when the last borrower leaves. Because nothing is repaid in the meantime, the amount owed rises steadily.

That structure is what makes a reverse mortgage useful to some borrowers and unsuitable for others. It frees up cash flow by removing a required payment, but it does so by trading away equity you might otherwise leave to your estate or use later.

Who can qualify: age and equity rules

Eligibility usually starts at age 55, though the exact minimum and the amount you can borrow depend on the lender, your age, the type of home, and its appraised value. Older borrowers and homes with more equity generally qualify for a larger advance. The property must typically be your principal residence and meet the lender's condition and location requirements. Because these rules vary, confirm the current age and equity criteria with the lender before you plan around them.

Some borrowers assume they can borrow the full value of the home. In practice the advance is a fraction of the appraised value, leaving a cushion so the debt does not overtake the property. Ask what percentage of your home's value you would qualify for at your age.

How the balance compounds against your equity

The central feature of a reverse mortgage is compounding. Interest is charged on the balance and then added to it, so the next interest charge applies to a larger amount. Over many years, the debt can grow faster than the home appreciates, reducing the equity that remains for you or your estate. The table below shows the idea with clearly hypothetical figures.

The figures are illustrative only. Actual balances depend on the rate, the amount advanced, and how long the loan runs, while home values can rise or fall. Confirm the current terms with the lender.

What a reverse mortgage costs

Reverse mortgages are generally more expensive than conventional mortgages or lines of credit. Rates tend to be higher, there are often setup and appraisal fees, and the closing costs can be significant. Some products include a no-negative-equity guarantee, meaning the amount owed will not exceed the home's value when it is sold, but that protection comes with a price. Because the costs are added to the balance, they also compound. Ask for the total cost of borrowing in dollars over several scenarios, not just the headline rate.

Compare that total with the cost of the alternatives before you decide. A product that looks affordable on a monthly basis can be expensive once the compounded cost is measured against the equity it consumes.

When it might be considered

A reverse mortgage may be worth exploring for an older homeowner who wants to stay in the home, has substantial equity, and needs additional income or a lump sum but does not want a monthly payment. It can also suit someone who expects to remain in the home for many years and values the certainty of no required payments. In those narrow cases, it can convert illiquid equity into usable cash without forcing a sale. Outside those cases, the cost and compounding usually work against the borrower.

The fit is strongest when the borrower has a long expected stay in the home, a clear use for the money, and no cheaper source of funds. It weakens as soon as any of those conditions changes.

The risks and trade-offs

• The balance compounds, so the debt can grow quickly and erode your estate.
• Rates are usually higher than conventional borrowing, and fees are added to the balance.
• Selling or moving triggers repayment, which can complicate a change in plans.
• You must keep paying taxes, insurance, and maintenance, or the lender may require repayment.
• A smaller estate may be left for heirs, which can affect family plans.

These are real trade-offs, and they should be weighed against the benefit of staying in your home with no required payments. A reverse mortgage is not free money, and it is not reversible once the costs and interest have accumulated.

Alternatives to explore first

Before choosing a reverse mortgage, compare a home equity line of credit and model its cost with the HELOC payment calculator, a refinance to access equity, downsizing, or a smaller withdrawal from savings.

If cash flow is tight, the mortgage-free retirement guide and the missed payment guide cover other paths. Speak with a licensed professional and, if family is involved, discuss the plan openly. A reverse mortgage can be a legitimate tool, but it is rarely the first option to reach for.