Reverse Mortgages in Canada: How They Work and the Catch

What a reverse mortgage actually is

A reverse mortgage is a loan secured against your home that's available to Canadian homeowners who are typically 55 or older. Instead of you paying the lender every month like a regular mortgage, the lender pays you — as a lump sum, in scheduled advances, or as a line of credit you draw on as needed.

You keep the title to your home and can keep living in it. There's no requirement to make any payment on the loan while you live there, as long as you keep up with property taxes, home insurance, and basic upkeep. The loan, plus all the interest that's accumulated, only comes due when you sell the home, move out permanently (say, into long-term care), or pass away.

This is fundamentally different from a home equity line of credit (HELOC) or a second mortgage, both of which generally require income qualification and at least interest payments along the way. A reverse mortgage is built specifically for people who are equity-rich but cash-flow-tight in retirement.

How much you can actually borrow

The amount available depends mainly on your age, your home's appraised value, its location, and the lender's own limits — not your income or credit score, since there are no payments to qualify for. Generally, the older you are, the larger the share of your home's value you can access, because the lender expects a shorter time until the loan is repaid.

Lenders cap how much of your home's value they'll advance, and that cap is set conservatively so the accumulating interest doesn't outrun the home's value over a reasonable time horizon. You won't get anywhere close to your home's full appraised value, and multiple existing mortgages or liens will reduce what's available further.

Getting a specific number requires a lender quote based on your actual home and age — this isn't something a rule of thumb can responsibly estimate, and any precise percentage you see quoted should be confirmed directly with a federally regulated lender or the Financial Consumer Agency of Canada (FCAC) before you rely on it.

The catch: compounding interest and shrinking equity

Here's the part that surprises people: because you're not making any payments, the interest doesn't just accrue — it compounds. Each month's interest gets added to the loan balance, and next month you're charged interest on that larger balance too. Over ten or fifteen years, this can consume a very large share of your home's equity, especially since reverse mortgage interest rates tend to run noticeably higher than a standard mortgage rate, precisely because the lender is taking on more risk and giving up regular payments.

This is sometimes called negative amortization: instead of your debt shrinking over time like a normal mortgage, it grows. The math works against you the longer the loan is outstanding, which is why reverse mortgages tend to make the most sense for people who plan to stay in their home for a defined, shorter stretch rather than indefinitely.

• Every dollar you draw today is a dollar plus years of compounding interest that comes off your home's future sale proceeds. - The equity left for you (if you move) or your estate (if you pass away) shrinks the longer the loan runs. - Lenders are required to have you get independent legal advice before signing, precisely because this trade-off is easy to underestimate. - Closing costs, appraisal fees, and potential early-repayment or exit fees add to the real cost beyond the interest rate alone.

Who it's for, and what to check before signing

A reverse mortgage can be a reasonable tool if you're equity-rich, cash-poor, plan to stay in your home long-term, and have no better options — for example, you don't qualify for a HELOC, don't want to take on monthly debt payments in retirement, and aren't planning to leave the home as an inheritance priority.

Before you sign anything, get independent legal advice (lenders require this, and for good reason), get a second opinion from a fee-only financial planner if possible, and ask the lender directly for a full breakdown of the current interest rate, all fees, and a projection of what the loan balance will look like in 5, 10, and 15 years under today's rate.

Also compare it honestly against the alternatives: downsizing to a smaller or less expensive home, a conventional HELOC if you still have qualifying income, a personal line of credit, or simply drawing down other savings first. A reverse mortgage is rarely the cheapest source of cash — it's the source that requires no income and no monthly payment, and you pay for that flexibility.

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