Reviewed for accuracy by Joe White

For many Canadians, their home becomes their largest financial asset by the time they reach retirement. The challenge is that home equity does not necessarily provide money for everyday expenses. A homeowner can have substantial equity in a property and still find it difficult to cover renovations, unexpected expenses, debt payments or the rising cost of living.

A reverse mortgage is one way of accessing some of that equity without selling the home.

Reverse mortgages can provide useful financial flexibility, but they also have important costs and consequences. Interest accumulates on the amount borrowed, the balance generally increases over time, and the equity remaining in the home may decrease as a result. For that reason, a reverse mortgage should be considered alongside other available options rather than viewed automatically as either a good or bad financial product.

This guide explains how reverse mortgages work in Canada, who may qualify, how much may be available, what they can cost, how they affect home equity and an estate, and what homeowners should consider before making a decision.

What is a reverse mortgage?

A reverse mortgage is a loan secured by a homeowner’s property that allows the homeowner to access part of the equity in the home without selling it.

According to the Financial Consumer Agency of Canada, reverse mortgages are generally available to homeowners who are 55 years of age or older. A homeowner may usually borrow up to 55% of the current value of the home, although the actual amount available depends on factors such as the age of the homeowners, the property’s appraised value and characteristics, and the lender’s requirements.

Unlike a conventional mortgage, a reverse mortgage generally does not require regular mortgage payments while the borrower continues to meet the conditions of the loan.

This does not mean that the mortgage is free or that the debt remains unchanged. Interest is charged and added to the outstanding balance. As a result, the amount owed can increase over time.

The homeowner continues to own the home.

How does a reverse mortgage work in Canada?

Consider a homeowner who has lived in the same property for many years. The mortgage may have been paid off, or only a relatively small mortgage balance may remain. During that time, the property’s value may also have increased considerably.

The difference between the property’s value and the debt secured against it represents the homeowner’s equity. A reverse mortgage allows the homeowner to convert a portion of that equity into borrowed money.

Depending on the product and lender, funds may be available as a lump sum, through advances, or through another permitted payment arrangement.

The homeowner continues living in the property and retains ownership, subject to the terms of the mortgage. Interest accrues on the money borrowed and is added to the mortgage balance when it is not being paid as it accrues.

Eventually, the reverse mortgage must be repaid. This commonly occurs when the home is sold, the borrower moves out of the home, the last borrower dies, or the borrower defaults under the terms of the reverse mortgage.

Who can qualify for a reverse mortgage?

Reverse mortgages in Canada are generally designed for homeowners who are at least 55 years old. Where more than one person is registered on title, the lender may consider the ages of all of the registered homeowners. Individual lenders establish their own qualification requirements.

The property securing the reverse mortgage will also generally need to be the borrower’s principal residence. The Financial Consumer Agency of Canada describes this as typically meaning that the homeowner lives in the property for at least six months of the year.

A lender may consider factors including:

• the homeowner’s age
• the age of other people registered on title
• the property’s location
• the type and condition of the property
• the appraised value of the property
• existing mortgages or other debts secured against the property
• the lender’s own underwriting requirements

Being 55 or older does not mean that a homeowner will automatically qualify for a particular amount.

How much can you borrow with a reverse mortgage?

The Financial Consumer Agency of Canada states that homeowners may usually borrow up to 55% of the current value of their home. The words “up to” are important.

A homeowner with a $1 million property should not assume that a lender will automatically provide a $550,000 reverse mortgage. The maximum available amount will depend on the lender’s assessment and the circumstances of the homeowners and property.

Existing debt secured against the property also matters. If there is an existing mortgage, funds from the reverse mortgage may need to be used to repay that mortgage. The amount ultimately available to the homeowner can therefore be considerably different from a simple percentage of the property’s value.

Homeowners who want to explore an estimate based on their circumstances can use the Reverse Mortgage Calculator from Reverse Mortgages of Canada. The calculator provides an indicative range for educational purposes and is not a mortgage approval or commitment.

Do you make monthly payments on a reverse mortgage?

One of the distinguishing features of a reverse mortgage is that regular mortgage payments are generally not required while the mortgage remains in good standing and the borrower continues to meet the terms of the agreement.

That can make a reverse mortgage attractive to a homeowner whose wealth is concentrated in the home but whose monthly income is limited. There is an important distinction, however, between not being required to make regular payments and not incurring a cost.

Interest continues to accrue. When interest is added to the mortgage rather than paid, future interest may be charged on a growing balance. Over a long period, compounding can have a significant effect on the amount eventually owing.

How interest affects a reverse mortgage

The accumulation of interest is one of the most important concepts to understand before obtaining a reverse mortgage.

Suppose, purely as an illustration, that a homeowner borrowed $200,000 and made no payments toward the loan. If the effective interest cost were 6% annually and we ignored fees and other factors, the balance would not simply increase by $12,000 every year.

• After one year, approximately $212,000 would be owing.
• After five years, the balance would be approximately $267,600.
• After ten years, it would be approximately $358,200.
• After fifteen years, it would be approximately $479,300.

The example demonstrates why the length of time a homeowner expects to keep a reverse mortgage can be as important as the initial amount borrowed.

What does a reverse mortgage cost?

The interest rate on a reverse mortgage is generally higher than the rate available on a conventional mortgage or home equity line of credit.

There may also be other costs associated with arranging the mortgage, including an appraisal, legal services, title-related expenses, administrative charges or other lender fees. The precise costs vary by lender and product.

Homeowners should therefore consider the total cost of borrowing rather than focusing exclusively on the amount of cash they can receive. A reverse mortgage that solves an immediate cash-flow problem can still have a substantial long-term cost if the balance remains outstanding for many years.

Is money from a reverse mortgage taxable?

Money received from a reverse mortgage is borrowed money rather than employment or investment income. The Financial Consumer Agency of Canada describes the money obtained through a reverse mortgage as tax-free.

FCAC also states that reverse mortgage proceeds do not affect Old Age Security or Guaranteed Income Supplement benefits. A homeowner with questions about their particular tax or benefit situation should obtain appropriate tax or financial advice rather than relying solely on a general rule.

When does a reverse mortgage have to be repaid?

A reverse mortgage does not mean that repayment can never be required during the homeowner’s lifetime. According to the Financial Consumer Agency of Canada, repayment of the loan and accumulated interest can be required when:

• the homeowner sells the home
• the homeowner moves out of the home
• the last borrower dies
• the borrower defaults on the reverse mortgage

The mortgage agreement may contain additional requirements and conditions, so homeowners should understand the specific terms of their contract. This is particularly important for someone considering a future move to a retirement residence, long-term care facility, another city or a smaller home.

Can you sell your home if you have a reverse mortgage?

Yes. Having a reverse mortgage does not prevent a homeowner from selling the property. The reverse mortgage balance would generally need to be repaid from the proceeds of the sale, subject to the terms of the mortgage agreement.

The homeowner would then receive the remaining equity after the mortgage and other applicable costs were paid. This makes the amount of equity remaining in the property an important consideration for homeowners who believe they may eventually sell or downsize.

Who owns the house with a reverse mortgage?

The homeowner continues to own the home. A reverse mortgage is a loan secured against the property. It does not normally involve transferring ownership of the home to the lender.

Ownership also comes with continuing responsibilities. Depending on the mortgage agreement, these may include maintaining the property, keeping property taxes and insurance current, using the property as required by the agreement and complying with the other terms of the mortgage.

Failure to meet contractual obligations can have serious consequences, including potentially placing the mortgage in default.

What happens to a reverse mortgage when the homeowner dies?

When the last borrower dies, the reverse mortgage will generally become repayable according to the lender’s mortgage terms. This is an important estate-planning consideration.

The estate may repay the mortgage using other assets, or the property may be sold and the reverse mortgage repaid from the sale proceeds. The remaining equity would then form part of the estate, subject to other debts, expenses and legal obligations.

The amount remaining for beneficiaries will depend partly on the value of the property at that time and the amount owing under the reverse mortgage. FCAC specifically identifies the potential reduction in the value of an estate as one of the disadvantages homeowners should consider.

How can a reverse mortgage affect your home equity?

A reverse mortgage converts part of the homeowner’s existing equity into debt. If no payments are made and interest continues to accumulate, the debt increases.

At the same time, the value of the home may increase, decrease or remain relatively stable. Nobody can know with certainty what a particular property will be worth many years in the future.

The amount of equity remaining at any future date will therefore depend on both sides of the equation: the future value of the property and the future mortgage balance. This is why homeowners should be cautious about assuming that future increases in property value will automatically offset the accumulating cost of a reverse mortgage.

Advantages of a reverse mortgage

Accessing equity without selling the home

Some homeowners want to remain in their current home but need access to money that is tied up in the property. A reverse mortgage can provide access to part of that equity without requiring an immediate sale.

No required regular mortgage payments

For a homeowner with limited retirement income, eliminating the need for required regular mortgage payments can provide meaningful cash-flow flexibility.

The homeowner retains ownership

The homeowner continues to own the property, provided the obligations under the mortgage are met.

Flexible use of the borrowed money

Depending on the mortgage product, homeowners may use the proceeds for purposes such as paying existing debt, renovations, healthcare expenses, helping family members or supplementing retirement resources.

Reverse mortgage proceeds are borrowed money

FCAC states that reverse mortgage proceeds are tax-free and do not affect OAS or GIS benefits. These advantages can be significant, but they should be considered together with the costs and risks.

Disadvantages and risks of a reverse mortgage

Interest accumulates

Unless interest is being paid, it is added to the mortgage balance. This can cause the amount owing to increase substantially over a long period.

Interest rates are generally higher

FCAC notes that reverse mortgage interest rates are usually higher than rates on conventional mortgages and HELOCs.

Home equity may decrease

As the mortgage balance increases, the homeowner’s remaining equity may decline unless increases in property value are sufficient to offset the growing debt.

The estate may receive less

A larger mortgage balance means less equity may remain for beneficiaries.

There may be additional costs

Legal, appraisal, administrative and other costs can make a reverse mortgage more expensive to establish than some alternatives.

Changing plans can matter

A homeowner who expects to remain in a property for many years may evaluate the product differently from someone who expects to sell the home relatively soon. Mortgage terms, including potential prepayment costs, should be reviewed carefully.

When might a reverse mortgage make sense?

There is no single answer that applies to every homeowner. A reverse mortgage may be worth investigating when a homeowner wants to remain in the home, has substantial home equity, needs additional funds, and does not want or cannot comfortably manage the regular payments associated with another form of borrowing.

For example, a homeowner may want to renovate a property to make it more suitable for aging in place. Another homeowner may have significant equity but limited retirement income and want to eliminate an existing mortgage payment. Someone else may face expenses that cannot easily be covered from available savings.

In each situation, the relevant question is not simply whether the homeowner qualifies for a reverse mortgage. The more important question is whether the reverse mortgage is suitable compared with the realistic alternatives.

When might a reverse mortgage not be the right choice?

A reverse mortgage deserves additional scrutiny when the homeowner expects to sell the property soon, has access to substantially less expensive financing that can comfortably be repaid, wants to preserve as much home equity as possible for an estate, or can meet the same objective through another practical solution.

It may also be inappropriate to use a reverse mortgage simply because the homeowner qualifies for one. Borrowing against home equity has a cost, and the purpose of the borrowing should justify that cost.

Someone considering a relatively small, short-term expense, for example, may find that a different source of funds is less expensive. A homeowner already planning to move may determine that selling or downsizing addresses the underlying financial issue more effectively.

The decision should begin with the homeowner’s needs, not with the mortgage product.

Reverse mortgage vs. HELOC

A home equity line of credit and a reverse mortgage both allow homeowners to borrow against home equity, but they operate differently.

A HELOC may be less expensive for a homeowner who qualifies and can comfortably make the required payments. A reverse mortgage may be more practical for someone whose income makes regular debt payments difficult but who has substantial home equity.

Neither product is automatically preferable. The homeowner’s financial circumstances determine which, if either, is appropriate.

Reverse mortgage vs. refinancing

A conventional mortgage refinance may allow a homeowner to access equity at a lower interest rate than a reverse mortgage. The trade-off is that a conventional mortgage normally requires regular principal and interest payments and qualification under the lender’s underwriting requirements.

A homeowner with sufficient income to qualify and comfortably support those payments may find conventional refinancing less expensive. For another homeowner, adding a significant monthly payment during retirement may defeat the purpose of accessing the equity in the first place.

The payment obligation therefore needs to be considered alongside the interest rate.

Reverse mortgage vs. selling or downsizing

Selling the property can release considerably more of the homeowner’s equity because there is no need to borrow against the home. The obvious disadvantage is that the homeowner must move.

For some Canadians, remaining in a longtime family home is extremely important. The property may be close to family, friends, healthcare providers and an established community. Moving also involves real estate expenses, legal expenses, moving costs and the cost of purchasing or renting another residence.

For others, downsizing may provide a better long-term solution by releasing equity while also reducing property taxes, utilities, maintenance and other housing costs.

FCAC recommends considering alternatives before deciding on a reverse mortgage, including selling and buying a smaller home, obtaining a HELOC, getting another type of mortgage, or using a personal loan or line of credit.

Who offers reverse mortgages in Canada?

The Canadian reverse mortgage market is considerably smaller than the conventional mortgage market.

The Financial Consumer Agency of Canada currently identifies HomeEquity Bank and Equitable Bank as federally regulated financial institutions offering reverse mortgages. Other financial institutions and mortgage brokers may also provide access to reverse mortgage products.

Products, interest rates, lending limits and qualification requirements can change. Homeowners should compare current options rather than relying on historical rates or product features.

Reverse mortgages in Ontario

Ontario homeowners who obtain a reverse mortgage through a mortgage brokerage have important regulatory protections. Mortgage brokerages in Ontario are regulated by the Financial Services Regulatory Authority of Ontario, commonly known as FSRA.

Ontario mortgage brokerages have obligations concerning suitability and disclosure of material risks. FSRA states that once a mortgage option is recommended, the brokerage must disclose actual and potential material risks associated with the mortgage and obtain written acknowledgement that the disclosure has been provided.

Reverse mortgages have an additional requirement. A mortgage brokerage cannot arrange or enter into a reverse mortgage with a borrower unless the borrower provides a written statement signed by a lawyer confirming that the lawyer has provided independent legal advice concerning the proposed reverse mortgage.

Independent legal advice is an important protection because a reverse mortgage can affect a homeowner’s finances, home equity and estate for many years.

Questions to ask before getting a reverse mortgage

1. How much money do I actually need?
2. What interest rate will apply?
3. Is the rate fixed or variable?
4. How frequently is interest compounded?
5. What will the approximate balance be after five, ten and fifteen years if I make no payments?
6. What fees will I pay to establish the mortgage?
7. Can I make voluntary payments?
8. Are there limits on those payments?
9. What happens if I repay the mortgage early?
10. What happens if I sell my home?
11. What happens if I need to move into long-term care?
12. What events could put the mortgage into default?
13. How much equity could remain under different assumptions?
14. How quickly must my estate repay the mortgage after my death?
15. What alternatives have I considered?
16. How would those alternatives compare in total cost?
17. How might this decision affect my spouse or other people living in the home?
18. How might it affect the estate I intend to leave to my beneficiaries?

A homeowner should be able to obtain clear answers to these questions before signing a mortgage agreement.

Frequently asked questions about reverse mortgages

About REMIC

The Real Estate and Mortgage Institute of Canada (REMIC) provides mortgage education and professional training in Ontario. REMIC’s educational programs include mortgage agent and broker licensing education, continuing education and advanced mortgage training.

This guide is provided for educational purposes. It is intended to help consumers understand reverse mortgages and should not be interpreted as a recommendation that a reverse mortgage, or any particular mortgage product, is suitable for an individual homeowner.