I have never seriously considered a reverse mortgage myself, but I recognize why the product attracts attention—those TV ads are everywhere in Canada and the U.S. Reverse mortgages can suit a narrow group of homeowners, yet they are not widely available in Canada. The main providers I’m aware of are Equitable Bank and HomeEquity Bank (also known as CHIP Reverse Mortgage). According to the Government of Canada, reverse mortgages generally cost more than conventional mortgages and home equity lines of credit (HELOCs), since borrowers are not required to make regular payments and lenders often wait many years—typically seven to 12—to be repaid.
In my view, a reverse mortgage should be considered only as a last resort: for homeowners who need tax-advantaged monthly income, who do not expect to leave significant assets to heirs, and who want to remain in their home for as long as possible.
Jason Heath, an advice-only financial planner at Objective Financial Partners Inc., echoes that caution. “I think retirees should generally look to their investments or a home equity line of credit before a reverse mortgage,” he says. “They should also consider downsizing or selling and renting.” HELOCs and traditional mortgages generally require borrowers to meet income criteria; retirees often qualify for less borrowing power, which can make those options impractical.
What is a reverse mortgage?
A reverse mortgage allows a homeowner aged 55 or older to borrow against up to 55% of the appraised value of their primary residence. Funds can be paid as a lump sum or in multiple draws. To qualify, borrowers must have paid off any existing mortgage, HELOC, or other debts secured against the property; proceeds from a reverse mortgage can be used to repay those obligations.
Reverse mortgage proceeds are typically tax-free, which can be attractive as a source of income. However, interest accrues on the loan balance, and the debt grows over time, reducing the value remaining in the estate for heirs.
Who should consider a reverse mortgage in Canada
A reverse mortgage may make sense for older homeowners who need regular, tax-free income and either have no heirs or have heirs who will not be materially affected by a smaller inheritance. For example, some retirees who bought property decades ago have substantial home equity but limited liquid assets; converting that equity to income while remaining at home can be beneficial for their quality of life.
Author P.J. Wade, who wrote Have Your Home and Money Too, captures the dual nature of reverse mortgages: they can be “your best friend or your worst enemy… your choice.” That captures the reality—these loans can provide valuable cash flow but also diminish the equity that could pay for future long-term care or be passed to heirs.
How reverse mortgages work and the costs involved
Matthew Ardrey, senior wealth advisor at TriDelta Financial in Toronto, describes a reverse mortgage as leveraging your home after age 55. Institutions create a loan secured against the property, and borrowers can draw periodically or take a lump sum. Lenders typically offer up to 55% of a home’s value, though the amount may be lower depending on circumstances.
Interest on reverse mortgages compounds over time because borrowers often do not make regular payments. Ardrey highlights an example used by a provider: on a $600,000 home, drawing $150,000 in year one at a 6.34% interest rate yields about $54,939 of accumulated interest after five years. The outstanding balance would then be roughly $204,939—meaning interest alone represents about 25% of the balance after only five years. Over longer periods, interest can consume a large portion of the home’s value.
Rates for reverse mortgages are typically higher than for traditional mortgages or HELOCs because lenders assume the loan is repaid much later. Currently, reverse mortgage variable rates can be in the high single digits (for example, roughly 9.5% in some markets), while 5‑year variable mortgage rates and 5‑year fixed mortgage rates tend to be lower. HELOC rates are usually tied to prime plus a margin and can be more competitive, though lenders can reduce a HELOC limit or call the balance if terms require.
Risks to consider
- Rising interest and compound growth of the loan balance can erode home equity over time.
- Using home equity may limit the ability to sell the property to pay for retirement living or long-term care later on.
- Reverse mortgages reduce the capital available to heirs and may complicate estate planning.
- Higher rates and fees mean a premium is paid for the flexibility and tax advantages of reverse mortgage income.
Alternatives to a reverse mortgage for retirees
Many financial advisors rarely include reverse mortgages in retirement plans. Allan Small, senior investment advisor with IA Private Wealth Inc., says that in his experience retirees more often access equity by downsizing—selling a larger home and moving to a smaller one—rather than extracting money while continuing to live in the property.
Finance professor Moshe Milevsky emphasizes context: “Compared to what?” The suitability of a reverse mortgage depends on the alternative. If the alternative is selling and downsizing, or drawing on investments, those options might be preferable. But if the alternative is a significant drop in living standards, a reverse mortgage may be a reasonable choice. He also notes the interest-rate risk and the challenge retirees may face managing complex financial arrangements as they age.
Ultimately, a reverse mortgage is a tool with specific benefits and meaningful drawbacks. It can provide tax-free income and let homeowners stay in their home, but it comes at a cost: higher interest rates, compounding debt, and reduced estate value. Before deciding, retirees should assess their overall financial picture, consider downsizing, evaluate investments and HELOCs, and seek independent financial advice to compare alternatives and determine the most sustainable plan for their retirement.
Related topics to explore
- Downsizing and how to unlock home equity
- Comparing reverse mortgages, HELOCs and traditional mortgages
- Planning for retirement living and long-term care costs
- Estate planning when you own substantial home equity