Understanding the Hidden Truth About Reverse Mortgages

Many Canadian homeowners approaching or in retirement find themselves “house rich and cash poor.” A reverse mortgage can look like a simple way to turn part of that home equity into spending money, but the reality is more complex. To understand the hidden truth, it helps to look carefully at how these loans work, what they cost, and how they might affect your estate and long‑term financial security.

What is a reverse mortgage and how does it work?

A reverse mortgage is a loan secured against your principal residence that lets you access a portion of your home equity without making regular mortgage payments. In Canada, these products are generally available to homeowners aged 55 or older. The lender advances funds to you as a lump sum, regular payments, a line of credit, or a combination. Interest is added to the loan balance over time instead of being paid each month.

Unlike a traditional mortgage, you do not have to repay the reverse mortgage until you sell the home, move out for an extended period, or pass away. At that point, the loan, plus all accumulated interest and fees, is usually repaid from the sale proceeds of the property. You remain responsible for paying property taxes, home insurance, and maintenance costs; falling behind on these obligations can put the loan, and your home, at risk.

True costs associated with reverse mortgages

Although reverse mortgages remove the burden of monthly payments, they are not low‑cost borrowing. Interest rates are typically higher than on conventional mortgages or home equity lines of credit. Because you are not making regular payments, the interest compounds over many years, so the total amount owed can grow quickly and significantly erode your remaining home equity.

In addition to interest, you can expect various upfront costs. These may include appraisal and application fees, independent legal advice fees, and closing costs charged by your lawyer or notary. Some lenders may also charge prepayment penalties if you choose to repay the loan early or sell your home sooner than expected. When viewed together, these charges mean that accessing home equity this way can be considerably more expensive than many other forms of credit.

Canada’s reverse mortgage market is relatively concentrated, with a small number of specialized lenders. HomeEquity Bank (offering the CHIP Reverse Mortgage) and Equitable Bank are two nationwide providers that publish indicative rate ranges and general cost information. Their products share common features, but each has its own rate structures, fee policies, and options for how you can receive funds.

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.

How a reverse mortgage can affect estate planning

Because the loan and accumulated interest are usually repaid when the home is sold, a reverse mortgage directly affects how much of your property value is left for your heirs. If you live a long time after taking out the loan, the compounding interest can substantially reduce the equity remaining in your estate. In some cases, the sale proceeds may be just enough to cover the loan, leaving little or no cash for beneficiaries.

For Canadian families, it is important to coordinate a reverse mortgage with your will, powers of attorney, and any plans to transfer property to children or other relatives. Joint ownership arrangements, blended families, and second marriages add further complexity. Discussing potential scenarios with an estate professional or lawyer can help avoid disputes among heirs, particularly if some family members expect to inherit the home itself rather than a share of the remaining sale proceeds.

Hidden risks that could affect your financial future

Beyond the obvious impact on home equity, reverse mortgages carry several less visible risks. Because interest rates can change over time, especially if you choose a variable‑rate option, the long‑term borrowing cost may end up being higher than expected. Living longer than you anticipated also means more years of compounding interest, which can accelerate the reduction in your net worth.

There are also lifestyle and housing risks. If your health changes and you need to move into assisted living or long‑term care, the reverse mortgage will typically come due when you no longer occupy the home as your principal residence. That can force a sale at a time when the market is not favourable. In addition, if you fail to keep up with property taxes, insurance, or major repairs, the lender may consider you in default, which can ultimately put ownership of the home at risk.

How to make an informed decision about a reverse mortgage

Deciding whether to use a reverse mortgage requires looking at your full financial picture and long‑term goals. It may be useful to compare this option with alternatives such as downsizing to a smaller home, renting part of your property, using a conventional home equity line of credit, or exploring government benefits and tax credits available to older Canadians. Each approach has its own trade‑offs in terms of flexibility, cost, and impact on your future housing choices.

An informed decision also involves clear communication with family members who may be affected by your estate plans. Sharing your reasoning and documenting it properly can reduce confusion later. Before proceeding, many Canadians choose to speak with a financial planner and an independent lawyer to review the contract, understand all fees, and model how the loan balance could grow over time under different interest‑rate and housing‑market scenarios.

A reverse mortgage can provide much‑needed cash flow in retirement, but it is a powerful financial tool that reshapes your home equity, your estate, and your long‑term options. By examining how it works, what it really costs, and how it interacts with your broader financial plans, you can better judge whether it aligns with your priorities and comfort with risk.