The Hidden Truth About Reverse Mortgages: What Lenders Don't Tell You

Reverse mortgages can be a practical tool for Canadians who want to access equity without selling, yet the mechanics are more complex than most marketing suggests. Interest accrues over time, fees vary by lender, and certain obligations—like paying property taxes—remain on you. Understanding how the loan grows, how it affects your estate, and which rate choices reduce risk can help you decide if this option fits your financial plan in your area.

Reverse mortgage costs: what really adds up?

Reverse mortgage costs include more than the posted interest rate. Expect an appraisal, administrative or set-up charges, legal fees (including independent legal advice, which most Canadian lenders require), and potential discharge or prepayment charges if you pay off early. Closing costs typically come out of the initial advance, meaning you net less cash on day one. Over time, interest accrues on both the principal and most fees that were financed, which accelerates the balance due. Because borrowing limits increase with age and depend on property value and location, two neighbours can see very different totals. Build a buffer for home insurance, property taxes, and maintenance—lenders expect you to keep the home in good repair and payments current.

Home Equity Conversion Mortgage (HECM) vs Canada’s options

You may see references to the Home Equity Conversion Mortgage (HECM), a U.S. program insured by the FHA. Canada does not have an equivalent federal insurance program. Instead, reverse mortgages here are offered by federally regulated banks and other financial institutions under Canadian lending standards. That means program rules, counselling requirements, and insurance protections differ from HECM. Canadian lenders set their own underwriting, rate terms, and fee structures, and they require independent legal advice before closing. If you’re reading American resources, translate concepts carefully: some features—like specific draw limits, mortgage insurance premiums, or servicing rules—don’t apply in Canada. Focus on Canadian providers’ documentation and seek local services for advice that reflects provincial laws and practices.

Reverse mortgage risks to consider

The most significant risk is equity erosion from compounding interest. If rates rise or you borrow early and live in the home for many years, the balance can grow faster than expected, leaving less for heirs. Rate type matters: variable rates can change during the term, while fixed rates lock a rate for a set period but may come with prepayment charges if you exit early. You must continue paying property taxes, insurance, and condo fees; falling behind can trigger default. Moving out permanently, selling, or the borrower’s death typically makes the loan due and payable. While loan advances are generally not taxable income in Canada, using funds to invest could create taxable income, and interest may or may not be deductible depending on use—ask a qualified tax professional. Finally, reverse mortgages are first charges on title; other debts secured to the property will be affected by this priority.

Estate planning with a reverse mortgage

Estate planning should start before you sign. Discuss your plan with family and document it in your will and powers of attorney. When the last borrower dies or moves to long-term care, the estate or heirs must repay the balance—usually by refinancing or selling the home. Lenders commonly allow a limited window (often around six months and sometimes extendable) to settle the balance, but timelines, extensions, and interest accrual continue, so clarity helps everyone. If leaving the home to heirs is a priority, model different rate scenarios and home price paths to see how much equity might remain. Coordinate with your lawyer on title issues and with your financial planner to understand interactions with income-tested benefits, liquidity needs, and other assets.

Reverse mortgage interest rates and how they grow

Reverse mortgage interest rates in Canada are typically higher than conventional mortgages. Choices include fixed terms (e.g., one to five years) and variable options that change with lenders’ prime-related benchmarks. The Annual Percentage Rate (APR) captures interest plus certain fees and is useful for comparing offers. Compounding magnifies the effect of rate differences: a rate that is one percentage point higher can lead to a materially larger balance across a decade. Draw strategies matter too. Taking only what you need (e.g., lump sum plus future advances where available) can reduce interest over time compared with borrowing the maximum on day one. Ask how often variable rates reset, whether there are rate-change caps, and how prepayment privileges work if you plan to downsize later.

With costs and comparisons in mind, here is a Canada-focused view of real providers and typical cost elements. Figures below are broad estimates in CAD and vary by property value, location, age, loan-to-value, and term.

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.

A practical pricing insight: the largest long-run driver of cost is time. Borrowing earlier or drawing the maximum upfront increases interest paid. When comparing quotes in your area, request the APR, a full fee list, sample amortization under both fixed and variable scenarios, and a breakdown of prepayment charges. If you expect to sell within a few years, a shorter fixed term or specific prepayment privileges might reduce exit costs even if the headline rate is slightly higher.

In summary, reverse mortgages can ease cash flow for Canadian homeowners who want to age in place, but the trade-offs are real. Understand the full cost stack, how compound interest interacts with rate type and time, and the implications for your estate plan. Review lender documents carefully, obtain independent legal advice, and coordinate with local services and qualified advisors so the solution aligns with your long-term goals.