What Is a Reverse Mortgage and How Does It Work in Canada

Mario R
Sep 26
5 min read

When planning for retirement, many Canadians start looking at options to supplement their income without selling their homes. For homeowners 55 and older, one financial product that often comes up in conversation is a reverse mortgage. While it can sound complex at first, the concept is relatively straightforward once you break it down. In this article, we’ll explain what a reverse mortgage is, how it works in Canada, whether it’s a good idea, and even whether you can use one to buy a home.

What Is a Reverse Mortgage?

A reverse mortgage is a loan product designed specifically for Canadian homeowners aged 55 or older. Unlike a traditional mortgage, where you make monthly payments to reduce your balance, a reverse mortgage allows you to borrow against the equity in your home and receive that money as a lump sum, regular payments, or a combination of both. The key difference is that you don’t have to make monthly mortgage payments while living in your home. Instead, the loan (plus accumulated interest) is repaid when you sell your home, permanently move out, or pass away. In Canada, reverse mortgages are regulated financial products, most commonly offered by HomeEquity Bank’s CHIP Reverse Mortgage and Equitable Bank. These lenders have established eligibility criteria, including being over 55 and owning a Canadian home that meets valuation standards.

How Does a Reverse Mortgage Work?

Here’s a step-by-step look at how reverse mortgages function in Canada:

1. Eligibility

To qualify for a reverse mortgage in Canada, you must:

Be 55 years or older (both spouses if jointly applying).
Own your home in Canada (primary residence).
Have a home that meets the lender’s minimum value requirements.
Ensure any existing mortgage or home equity loan is paid off with the reverse mortgage proceeds.

2. Accessing Home Equity

Once approved, you can typically borrow up to 55% of your home’s appraised value. The exact amount depends on:

Your age (the older you are, the more you may be eligible to borrow).
The home’s appraised value.
The property type and location.

3. Payment Options

Funds from a reverse mortgage can be received in different ways:

Lump sum – a one-time payment for larger expenses.
Regular payments – monthly or quarterly income to supplement retirement funds.
Combination – part lump sum and part regular payments.

4. Repayment

Unlike traditional mortgages, you don’t make monthly payments. Instead:

The loan, plus interest and fees, is repaid when you sell your home or it’s no longer your primary residence.
If both spouses are on the title, repayment isn’t required until the last surviving spouse leaves the home.

This feature allows seniors to remain in their homes without the financial stress of monthly mortgage payments.

Is a Reverse Mortgage a Good Idea?

Whether a reverse mortgage is a “good idea” depends entirely on your personal financial situation, goals, and comfort level. Let’s look at the pros and cons.

Advantages

Stay in Your Home – You don’t have to sell your home to access its value.
No Monthly Payments – Cash flow is preserved since you don’t need to make mortgage payments.
Tax-Free Cash – Money from a reverse mortgage is not considered taxable income.
Flexible Options – Choose between lump sum, regular income, or a combination.
Protection Against Negative Equity – Canadian reverse mortgages guarantee that you’ll never owe more than your home’s fair market value when sold.

Disadvantages

Interest Accumulates – Since payments aren’t made monthly, the loan balance grows over time.
Reduces Estate Value – The amount left for heirs will likely be smaller.
Fees Apply – Appraisal fees, setup costs, and legal fees can add up.

Borrowing Limits – You may not access as much as you could through selling your home outright.

When It Makes Sense

A reverse mortgage may be a good fit if:

You want to remain in your home during retirement.
You have significant home equity but limited retirement income.
You prefer not to make monthly debt payments.
You need funds for healthcare, renovations, or day-to-day expenses.

It may not be ideal if:

Preserving your estate for heirs is a top priority.
You have alternative income or assets that could meet your needs.
You expect to move out of your home in the near future.

Can You Buy a Home With a Reverse Mortgage in Canada?

Interestingly, yes—you can use a reverse mortgage to buy a new home in Canada. This is often called a reverse mortgage purchase.

Here’s how it works:

Instead of only refinancing your current home, you can take out a reverse mortgage to help fund the purchase of a new primary residence.
For example, if you sell your current home and want to downsize, you can use proceeds from the sale combined with a reverse mortgage to buy your next home.

This option is particularly appealing to retirees who want to move closer to family, relocate to a smaller or more manageable property, or settle in a different community without taking on traditional mortgage payments.

Alternatives to a Reverse Mortgage

Before committing, it’s wise to explore alternatives that may also meet your financial goals:

Home Equity Line of Credit (HELOC): Provides flexible borrowing against your home equity but requires regular payments.
Downsizing: Selling your home and moving to a smaller property can free up cash without incurring interest costs.
Government Programs: Seniors may be eligible for income supplements, tax credits, or grants.
Traditional Mortgage or Loan: Depending on income, some may qualify for conventional borrowing with predictable repayment terms.

Key Considerations Before Choosing a Reverse Mortgage

Discuss With Family – Since it affects your estate, it’s wise to include children or heirs in the conversation.
Review All Costs – Beyond interest, factor in appraisal fees, closing costs, and legal fees.
Seek Professional Advice – Financial planners and mortgage brokers can help you compare options and ensure they fit your long-term goals.
Understand Long-Term Impact – Think about how it affects your ability to move, downsize, or leave an inheritance.

Final Thoughts

A reverse mortgage can be a powerful tool for Canadian homeowners 55 and older who want to unlock the value of their home while continuing to live in it. By providing tax-free funds with no monthly payments required, it offers flexibility and peace of mind during retirement. However, it isn’t right for everyone. Interest costs, estate considerations, and long-term goals should all be carefully weighed and considered. For some, alternatives like downsizing or a HELOC may make more sense. If you’re considering whether a reverse mortgage is a good idea for your situation, take the time to evaluate your financial needs, discuss with family, and seek advice from a qualified mortgage professional in Canada. With the proper guidance, you can decide whether a reverse mortgage aligns with your retirement plans and lifestyle.