Interest rates on reverse mortgages are higher due to structuring of such loans and higher risks lenders take on compared to traditional mortgages. For homeowners aged 55 and older, however, the tradeoff is access to tax-free cash from their home without having to make monthly mortgage payments or sell their property.

In Canada, reverse mortgage rates presently sit between 6.00% and 8.00%, compared to roughly 3.80–4.50% for a conventional refinance.

Why are reverse mortgage rates higher in Canada?

Reverse mortgage rates are higher in Canada because lenders face longer repayment timelines, higher funding costs, greater property-value risk, and a smaller, less competitive market than they do with conventional mortgages.

Unlike a traditional mortgage, reverse mortgage lenders wait years to be paid back. With a traditional mortgage, the bank gets paid every month. With a reverse mortgage, interest builds up on your loan balance over time and your lender gets nothing until you sell or move out. That's a long time to wait, and the higher interest rate compensates for it.

"A lender does not receive their return on investment until the property is sold or the homeowner is deceased. Lenders are exposed to interest rate and property value risk over a long horizon—and funding is different than conventional mortgages,” says Victor Tran, mortgage expert and rate specialist at Rates.ca.

“Higher interest rates [for reverse mortgages] reflect hedging costs, capital requirements, and the smaller market and demand for this type of product,” he adds.

1) Lenders don't qualify for government-backed funding. Banks can access cheaper funding for regular mortgages through federal programs. Reverse mortgages don't qualify, so lenders pay more to fund them and pass that cost on through the borrowing rate.

2) There aren't many lenders offering them. The reverse mortgage market in Canada is small. The main players are CHIP/HomeEquity Bank, Bloom, Home Trust, and Fraction. Less competition means less pressure to lower rates.

3) Lenders take on risk of falling home prices. Most reverse mortgages come with a 'No Negative Equity Guarantee', meaning you'll never owe more than what your home sells for. That's a protection for you, but a risk the lender absorbs.

Read more: How to better qualify for a mortgage in Canada

What affects your specific rate for a reverse mortgage in Canada?

Reverse mortgage rates are determined by a combination of borrower, property, and loan characteristics.

"Borrower-specific factors such as age, property value, location, and loan-to-value ratio all play a role—as does product structure: fixed versus variable, and the duration of the loan,” says Tran.

According to him, a few other things that can nudge your rate up or down:

• Loan term: Rates are slightly higher for longer terms. Most terms run one to five years.
• Flexibility: Products without prepayment penalties tend to have slightly higher rates.
• How you draw loan funds: If you take a lump sum upfront plus monthly deposits over time, the lump sum is charged at a fixed or variable term rate, and monthly draws are charged at a variable rate.

Read more: Does renewing your mortgage early save you money?

How does compound interest affect a reverse mortgage?

Compound interest is one of the biggest long-term costs of a reverse mortgage because interest is added to the loan balance over time, causing the amount you owe to grow faster than many homeowners expect.

"Since monthly payments are not required, interest compounds on the outstanding loan balance. This will grow quickly, which reduces equity over time,” says Train.

“A homeowner will not benefit as much if a property value rises due to a strong real estate market, because the loan balance is likely growing faster than typical home appreciation. There will also be less equity to pass on to family or an estate,” he adds.

There are also upfront costs to factor in. Unlike a regular refinance, which typically just involves legal and appraisal fees, reverse mortgages often come with additional lender and broker fees, charged as a percentage of loan amount.

How reverse mortgages compare to other financing options, according to Tran: 

One thing worth knowing about HELOCs: lenders can reduce or cancel your credit limit at any time, especially when the market gets rocky. That makes HELOCs a less reliable long-term option for retirees, even if the rate looks better upfront.

Learn more: How Canadian mortgage brokers work and ways they can save you money  

When is a reverse mortgage not advisable?

A reverse mortgage may not be the best option if you have other sources of income, significant savings, or qualify for lower-cost borrowing alternatives.

"I would advise against a reverse mortgage if the homeowner is still earning employment income, has assets elsewhere—TFSAs, RRSPs, non-registered investments—or could qualify for a traditional mortgage instead. It'll be cheaper and more flexible,” says Tran.  

In many cases, homeowners who qualify for a conventional mortgage, HELOC, or traditional refinance can access funds at a lower cost while preserving more of their home equity. Similarly, those with retirement savings or investment accounts may have alternatives that don't involve borrowing against their property.

Tran also notes that a reverse mortgage may not be ideal for homeowners with short-term plans for their property: “If the homeowner has plans to sell or pass the property to family, or if affordability is not a concern and they can afford payments, a traditional refinance or HELOC will likely be a better and cheaper option.” If the loan amount required is small, Tran recommends cheaper options.

Read next: Breaking your mortgage early: What you need to know

When is a reverse mortgage suitable for homeowners?

A reverse mortgage tends to be most suitable for older homeowners with substantial home equity, limited retirement income, and a desire to remain in their home without taking on monthly payments.

For many retirees, traditional borrowing options aren't practical. They may no longer meet income requirements for a conventional mortgage or HELOC, or they may be reluctant to add mandatory payments to a fixed retirement budget.

A reverse mortgage addresses that challenge by allowing homeowners to convert a portion of their home equity into tax-free cash without requiring regular principal or interest payments. This type of borrowing can provide financial flexibility while removing the risk of missed mortgage payments during retirement.

"Reverse mortgages are a great way for seniors to access equity and a large amount of money upfront, but it's typically best for those with limited income, significant equity in the property, and a strong desire to stay in their home without having to make any monthly payments,” says Tran.  

For homeowners whose wealth is concentrated in their property rather than in investment accounts, a reverse mortgage can serve as a way to fund retirement expenses, cover unexpected costs, or supplement income while continuing to live in a familiar home and community.

In a nutshell, a reverse mortgage isn't designed to be the cheapest borrowing option. It's designed to provide cash flow and flexibility for retirees who are home-equity rich but income constrained. Whether that tradeoff is worthwhile depends on your financial goals, borrowing alternatives, and long-term plans for your property.

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