How a reverse mortgage grows
With a regular mortgage, your payments cover the interest each month and chip away at the principal. With a reverse mortgage you make no payments, so each period's interest is added to what you owe. The next period, you're charged interest on the original advance and on all the interest already added. The balance grows faster every year.
A handy rule: divide 72 by the interest rate to estimate how long it takes the balance to double. At 7%, it doubles roughly every 10 years. A loan that starts at $200,000 is near $400,000 after 10 years and near $800,000 after 20, without a single extra dollar borrowed.
Worked example: $200,000 advance on an $800,000 home at 7.00%
| Year | Loan balance | Home value (3% growth) | Equity left |
|---|---|---|---|
| 0 | $200,000 | $800,000 | $600,000 |
| 5 | $282,120 | $927,419 | $645,300 |
| 10 | $397,958 | $1,075,133 | $677,175 |
| 20 | $791,852 | $1,444,889 | $653,037 |
If the home grows at 3% a year, equity holds up reasonably well. But if the home's value stays flat, the same loan leaves only about $8,000 of equity after 20 years. Add a $1,000 monthly advance on top of the lump sum and, even with 3% growth, the balance passes $1.3 million by year 20.
Who can get a reverse mortgage in Canada
Reverse mortgages in Canada are offered by a small number of lenders, most notably HomeEquity Bank (the CHIP Reverse Mortgage) and Equitable Bank. General requirements:
- Every owner on title must be at least 55.
- The home must be your primary residence.
- You can typically borrow up to about 55% of the home's appraised value, depending on your age, the home's location and type. Younger borrowers get less.
- You must keep paying property tax and home insurance and maintain the home. Falling behind on these can put the loan in default.
- Independent legal advice is required before you sign.
The loan comes due when the last borrower sells, moves out permanently, or dies. Your estate then repays it, usually by selling the home. Our guide to reverse mortgages in Canada covers costs, prepayment penalties and alternatives in more depth.
Decoder ring: "no negative equity guarantee"
Lenders typically promise you won't owe more than the home's fair market value when it's sold, as long as you've met the loan's conditions. Read the exclusions. Guarantees commonly exclude administrative costs and interest that builds up after the loan becomes due, so a slow estate sale can still eat into what's left.
The costs you won't see on the rate sheet
- Higher rates than regular mortgages, because the lender receives nothing until the end.
- Setup costs: an appraisal, independent legal advice, and closing or administration fees. These are often a few thousand dollars combined and are usually added to the loan, so they compound too.
- Prepayment penalties if you sell or repay within the first few years. Ask for the schedule in writing.
Questions to ask before you sign
- What is the rate, how is it compounded, and how often can it change?
- What are every one of the setup fees, and are they added to the loan?
- What are the prepayment penalties in years 1, 3 and 5?
- Exactly what does the negative equity guarantee exclude?
- How long does my estate have to repay after I die, and does interest keep accruing?
- Have I compared a downsize, a HELOC, or a provincial property tax deferral program?
All 15 questions are on worksheet B-5, the reverse mortgage checklist. Bring it to the meeting, and bring a family member.