Reverse Mortgages in Ontario: How They Really Work

Reverse mortgages are marketed almost entirely on emotion, stay in the home you love, access your equity, no monthly payments. All of that is true. What the commercials leave out is the compounding.

The mechanics

A homeowner aged 55 or older borrows against home equity, typically up to 55% of the home's value depending on age, location and property type. No monthly payments are required. Interest accrues and is added to the balance. The loan is repaid when the home is sold, when the owner moves out permanently, or from the estate.

Why compounding is the whole story

Because nothing is paid monthly, interest compounds on interest. At rates typically several points above conventional mortgages, a balance can roughly double over a decade or so. Whether that erodes your equity depends entirely on whether the home appreciates faster than the loan grows. Over a long horizon in a flat market, it will not.

What's genuinely good about them

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• No income or credit qualification hurdles that block many retirees from conventional lending.
• No monthly payments, which protects cash flow on a fixed income.
• You keep title and can stay in the home.
• Canadian reverse mortgages carry a no-negative-equity guarantee: you or your estate will not owe more than the home's fair value at sale, provided obligations are met.
• Proceeds are not taxable income and don't affect OAS or GIS.

What to weigh against it

• Interest rates materially higher than a conventional mortgage or HELOC.
• Setup costs: appraisal, legal and administration fees.
• Prepayment penalties if you repay or sell early, within certain windows.
• Substantially reduced inheritance, a conversation worth having with family in advance.
• You must keep the home insured, in good repair and current on property tax, or the loan can be called.

The alternatives to price first

• HELOC or a conventional mortgage, if you can qualify, usually far cheaper.
• Downsizing, which frees more equity outright but costs a move.
• Renting out part of the home.
• Family loan arrangements, documented properly.

Where it makes sense

A reverse mortgage fits best for someone who is house-rich and cash-poor, strongly wants to stay put, cannot qualify for conventional credit, and has a shorter expected horizon in the home. It fits worst for someone in their late 50s who plans to stay 25 years and wants to leave the home to their children. Get independent legal advice, it is required for these products in Canada for good reason, and start by knowing exactly what the home is worth today.