The pros and cons of a Reverse Mortgage

Guest post from Tricia French, MSc, PHEc

A Reverse Mortgage is a means for homeowners to access a portion of the stored value of their home to use today, while still retaining ownership of their home. In effect, converting the equity to cash, which can be received as a lump sum, regular payments, or a combination of the two. The agreement is a “life-term” loan, which is a loan for either the lifetime(s) of the owners or the life of the ownership of the home.

Reverse mortgages are marketed very effectively. The portrayal seems undeniably convincing. Stay in your home. Remain independent. Maintain your financial freedom. Enjoy your money now, you deserve it. Renovate your house. Give your family money. Your home will continue to appreciate in value and offset interest costs and loss of equity.


  • Payments from a reverse mortgage are tax-free income, so income-tested benefits such as OAS and GIS will not be affected.
  • Reverse mortgages do not have to be repaid until you sell your home or you or your surviving partner pass away.
  • The freedom to eliminate monthly payments can be a benefit for stretched budgets.
  • You can repay the loan at any time.
  • If the investment market takes a downturn, a reverse mortgage could fill the gap until your investments stabilize or reach maturity.
  • The amount you owe can never exceed the value of your property.
  • You and your beneficiaries will not be responsible for any shortfall if interest rates increase and housing values drop.
  • Depending on the provider, funds can be received as a lump sum, regular payments or a combination of lump sum and regular payments.
  • Interest paid on the reverse mortgage is tax deductible if the proceeds were used to earn investment income (interest or dividends).


  • While your home may continue to appreciate in value and offset some of the interest costs and loss of equity, interest will rapidly accumulate on the amount you borrow.
  • Providers market the benefit of using a reverse mortgage to increase savings by shifting wealth from your home to your investments. This form of leverage adds risk.
  • Due to start-up fees and higher rates of interest, reverse mortgages are more costly than conventional lines of credit or mortgages. Early payment of all or a portion of the amount borrowed could subject you to prepayment penalties. Borrowing against your home will impact the amount available to pass on to your beneficiaries.
  • There are limited options as only two companies in Canada offer reverse mortgages: Canadian Home Income Plan (CHIP) and Seniors Money Canada.
  • Reverse Mortgages can be an expensive way to access some of the value built up in your home. Start-up fees can be significant and interest rates on reverse mortgages are much higher than standard mortgage rates. Start-up fees depend on options selected but typically include an application fee, home appraisal fee, and costs for independent legal advice. Fees can easily reach $2000 to $2500 which is deducted from the principle received.
  • The amount you can borrow through a reverse mortgage varies dramatically based on geographic location, the type of housing you own, your age and gender, and the amount of your current debt.  A reverse mortgage may not be an option depending on these circumstances.

Reverse Mortgage Lines of Credit

Reverse Mortgage Lines of Credit are available at some Credit Unions in British Columbia and Ontario. A reverse mortgage line of credit functions like a reverse mortgage in that no payments are required until you sell your house, or you and your surviving spouse pass away. You may make payments of interest or interest and principal if you wish. The limit on the line of credit is based on similar criteria to the reverse mortgage: property value, geographic location, type of housing, and amount of current debt.


Only two companies in Canada offer reverse mortgages: Canadian Home Income Plan (CHIP) and Seniors Money Canada. The Canadian Home Income Plan (CHIP) is a private corporation that has offered reverse mortgages since 1986, and is the leading provider. Seniors Money Canada, a division of Seniors Money International, was introduced to the Canadian Market from New Zealand in August 2007, and expanded offerings to include Western and Atlantic Canada in January 2008. Due to world economic conditions, Seniors Money has ceased accepting new loans. Many mortgage brokers or Accredited Mortgage Professionals (AMP) will provide information and advice regarding reverse mortgage products. Reverse mortgage providers partner with banks, credit unions, mortgage brokers, financial and investment advisors, and other financial professionals who are then compensated for providing client referrals.

As opposed to a standard mortgage, reverse mortgages are a growing debt that consumes the equity in your home. Though the balance, principle borrowed plus accumulated interest, does not need to be repaid until you sell or pass away, it is quietly mounting and can reach a level that your remaining equity is too depleted to allow you consider alternative types of housing, i.e., downsizing. You can run down your equity far faster than you built it. Both providers in Canada expect you to seek and pay for independent legal advice, to ensure you are entering into the agreement freely, that is, without pressure, and that you understand the contract and any potential risks.

Borrowing minimums and maximums vary between providers and are generally based on a percentage of the value of your home. However, the amount you can borrow through a reverse mortgage varies dramatically based on geographic location, the type of housing you own, your age and gender, and the amount of your current debt.

These products are complex and all costs, advantages, and disadvantages should be carefully contemplated within the context of your overall financial plan.

Patricia French is a Financial Counsellor and Professional Human Ecologist specializing in planning with clients under the age of 50. She is an experienced facilitator, pre-retirement educator, and University instructor with the Department of Human Ecology at the University of Alberta teaching in the area of family finance. She is driven to provide clients, participants, and students with key knowledge, skills, and strategies to navigate the often potholed financial road ahead.

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25 Responses to The pros and cons of a Reverse Mortgage

  1. I am absolutely NOT a fan of reverse mortgages; they’re an expensive way to tap your equity. Why not rent out a portion of your home? Borrow against your home? I would advise going to great lengths to avoid a reverse mortgage.

    • And what equity would the renter receive?
      Or is the rent to be set only at a portion of maintenance, administration, etc…
      and not any extra borrowed from the renter?
      Or would the rent include some extra borrowed amount and at what rate? 4% ??
      Or is the intention in the rent suggestion to rob the renter completely charging whatever one can ‘get away with’, eg: ‘market value’. ??

    • Totally agree, am NOT a fan of reverse mortgage. Seems like an expensive way of selling your home! I wrote to a CHIP advertiser, twice, I never got a reply, let alone an acknowledgement. Stay away.

  2. Reverse mortgages can be beneficial when used correctly but what amazes is the fact that there are only a few providers in the industry when compared to the conventional mortgage. I guess at the end of the day its because there isn’t a market for “reverse” mortgage backed securities. Getting controlled by hedge funds, pretty sad if you ask me!

    • There’s actually only one company currently offering reverse mortgages – CHIP. The others say due to economic times they are not offering RMs at this time.

  3. Jim, you are absolutely right. We have been getting a few inquiries from clients out in Ontario and the only lender we are able to use is CHIP.

    With prime still at 3% and the economy not recovering, I am getting our clients to go towards the HELOC route due to lower fees (only legal fees for re-registering the mortgage), better interest rate, convenience (online banking to check balances) and because HELOCs are open less a $250 discharge fee, it just make sense to go that route as opposed to the reverse mortgage.

    • Sorry Jim, don’t mean to double post but I forgot to add why we came to this conclusion. We were looking at a few pros/cons.
      With the HELOC:
      Positives – you are able to use up 80% ltv at a lower rate for now (prime + 0.5), no lender fees besides the legal fees and the appraisal. Draw funds at any time up to 80%
      Negatives – Still have to qualify for a mortgage, beacon score has to be over 650 for HELOCs, still have use income to qualify (pension income is totally fine), obligated to make monthly payments
      With the CHIP plan:
      Positives – Credit score/income not as stringent, no obligation for monthly but you are expected to pay a minimum of $1,000 yearly, same appraisal and legal fees.
      Negatives – Higher rate, lowest we are able to offer is the variable rate at 4.75, highest ltv is at 50%, $1,495 CHIP fee (which can be added to mortgage amounts).

      After looking at the pros/cons, we are favoring the HELOC, just wondering what your thoughts are on the subject.

      • Don’t for get that the widow has to requalify for a HELOC upon death of spouse which is a huge benefit for a reverse mortgage with seniors, no requalification and the risk that goes with a HELOC in that area

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  5. There are four beneficiaries to my mother’s estate. My brother is the executor and living in the house on the acreage. He caused flooding damage to the home. of which was partially covered by insurance. However, he ordered another 40,000 dollars in renovations which he should have know could not have been paid. Now he wants to get a CHIP loan for his portion of the estate and wants us other three beneficiaries give him title to the estate so he can pay for these debts. Is this advisable?(He has been very foolish with money and shows a great lack of transparency to us in anything he does with the estate.)He is not paying rent to the estate while he lives there.

  6. Hi JER: I went through something similar several years ago, but my brother and I have no idea where the money went from Mom’s estate. It was about 100,000 to be divided between 3 siblings,one sibling (married to the executor), had issues with my brother, so she held up the estate for 4 years, refused to give us any information about the estate, and in the end we finally got fed up and my brother and I had to hire a lawyer to get them to release the funds. They only decided to settle when they were threatened with a court date. Our lawyer cost us over 6,000.00 and in the end the two of us received 15,000.00 each. To this date we have no idea what happened to the rest, since my mom had no debt when she passed. Do the math! My sister does not speak to any of us, and from what I hear, is gravely ill. This should have been a time for remaining family to come together and support each other.It pains me to know that I will find out about my sister’s passing through the obituaries, and yes, I have tried to reach out to her, but she has chosen not to respond. I would have liked to be there for her in spite of everything. The only thing you can do is try to have the executor removed,and appoint someone else, or leave it alone, take your chances. In the end you and your siblings will be responsible for payment of his mistakes.I wish you luck in whatever you decide to do, and hope your family stays intact.

  7. Reliable information on the pros and cons of the reverse mortgage, It’s hard to pin point it but that’s the case on so many levels.

    I guess it all depends on the client who is. I agree with Al and Michael that the HELOC is probably the best bet but even then the chances aren’t great for qualification

  8. I am not in the position of needing a CHIP or HELOC loan at this time, but glad I read this, as I never knew HELOC existed. I had to take CPP disability and just wanted to know what options are out there, incase I was in a position of needing help down the road. Your comments have been so helpful and given me lots to think about. I think HELOC is the decision that I would go with.

  9. Reverse mortgage is like borrowing money from the mafia. Interest rates are almost three times that of a regular mortgage and there are huge upfront fees (application, appraisal, lawyer). If you borrow 100k in reverse mortgage, with compounded interest added to the principal, that amount doubles to 200k in less than 15 years. And if you are lucky(?) enough to live 30 years after you borrow the money, you will owe 400k. At that point you will have Zero equity in your home (unless you live in Vancouver).
    But having said that, many seniors have no other option. if you cannot afford food, medicine or heat and there is no other source of income but your paid-off home – reverse mortgage may be the difference between a miserable existence and a bit of quality in life.

  10. The fact is that many seniors in Canada live on $1,300 a month, so getting HELOC is a pipe dream, they would not qualify nor will they be able to make payments, even if it’s interest only. Selling their home may sound like an option, but you have to live somewhere, and another home may cost the same or more. The folks making $1,300 per month don’t have fancy homes, so selling may not net very much money and rent will eat up the proceeds fairly quickly. The only option left for them is a reverse mortgage.

    • You want to leave your children nothing, then get a reverse mortgage. Beware, is a big mistake. The compounding interest will eat everything up.

  11. anyone know how the CHIP interest is compounded? is it daily? or is it monthly? or annually? this makes a significant difference even at the very same quoted interest rate.

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