Understanding the Hidden Truth About Reverse Mortgages

Reverse mortgages promise access to home equity without monthly payments, which can be appealing if most of your wealth is tied up in your property. In Canada, they function differently from conventional loans and require careful review of costs, obligations, and long‑term trade‑offs. Understanding how they work and where pitfalls lurk helps you decide if the approach suits your financial plan.

What is a reverse mortgage and how does it work?

A reverse mortgage lets eligible homeowners aged 55 or older borrow against their home equity while keeping title to the property. The amount you can access depends on your age, home value, location, and property type. Instead of making monthly payments, interest is added to the balance (compound interest). The loan becomes due when you sell the home, move out for a defined period, or the last borrower dies. You must keep paying property taxes, home insurance, and maintain the home in good condition. If you fail to meet these obligations, the lender can demand repayment. In Canada, borrowing limits are conservative relative to home value, and some products include a no negative equity guarantee as long as contractual obligations are met.

What are the true costs of a reverse mortgage?

Total cost is more than the interest rate. Expect several one‑time and ongoing items: an appraisal, legal fees for independent legal advice, lender setup or administration fees, and potential prepayment penalties if you pay out early. Interest rates are usually higher than those for conventional mortgages or home equity lines of credit because no monthly repayment is required. Costs also vary by province, property type, and how you draw funds (lump sum versus planned advances). Even small rate differences matter because interest compounds over time, increasing the total you will repay when the loan comes due.

How can it affect estate planning?

A reverse mortgage reduces the equity remaining for your estate. When the loan ends, proceeds from the home sale first repay principal, accrued interest, and any fees, with any leftover going to beneficiaries. If only one spouse is a borrower and leaves the home, the loan may become due, which can force a sale sooner than expected. Many families add both spouses as borrowers if eligible and align the loan with powers of attorney and wills. Proceeds are generally not taxable as income, but interest is typically not deductible unless funds are used for income‑producing investments, a point to confirm with a tax professional. Coordination with life insurance, retirement income, and plans for downsizing helps preserve flexibility for heirs.

What hidden risks should you consider?

• Longevity and compounding: Living longer than expected means more years of compounding interest, which can erode home equity.
• Property obligations: Falling behind on property taxes, insurance, or maintenance can trigger default and repayment.
• Rate exposure: Variable rates can rise, accelerating the growth of the balance. Fixed terms can expire and reprice at renewal.
• Early exit surprises: If you move to assisted living, need to relocate, or sell sooner than planned, prepayment penalties may apply.
• Market risk: A housing downturn can reduce remaining equity at repayment, though many products limit liability to the home’s value when conditions are met.
• Opportunity cost: Using home equity now may limit resources for future needs or emergency expenses.

How to make an informed decision

Start with a clear purpose for the funds, a budget, and a time horizon for staying in the home. Compare alternatives such as a home equity line of credit, downsizing, government benefit programs, or family support. Request written quotes that detail rates, setup and legal fees, payout schedules, and prepayment terms. Seek independent legal advice to review the contract, and consider independent financial planning to assess cash flow, tax implications, and estate effects. Discuss the plan with family or executors so expectations are clear. When working with brokers or local services in your area, verify lender accreditation and product features, including guarantees and repayment options.

Canada’s reverse mortgage market is concentrated, which makes it practical to compare real products and typical cost ranges side by side. The estimates below reflect commonly reported ranges and can vary by borrower profile, property, province, and market conditions.

Prices, rates, or cost estimates mentioned in this article are based on the latest available information but may change over time. Independent research is advised before making financial decisions.

Conclusion Reverse mortgages in Canada can convert home equity into accessible funds without monthly payments, but they are not a simple source of free money. The combination of compounding interest, fees, and contractual obligations can significantly reduce future equity and affect an estate. A careful comparison of product features and costs, aligned with a realistic time horizon and independent advice, can help determine whether a reverse mortgage supports or undermines long‑term financial goals.