Reverse Mortgages and Home Equity in Retirement

Many homeowners reach retirement with most of their wealth in their home. If you want to stay put but need more income, there are several ways to draw on that equity. Here is how a reverse mortgage works, what it costs, and how it compares with a home equity line of credit, BC's property tax deferment and downsizing.

The short version

How a reverse mortgage works

A reverse mortgage is a loan secured by your home that you don't have to pay back while you live there. You keep ownership of the home. According to the Financial Consumer Agency of Canada:

• Who qualifies. Homeowners usually aged 55 or older, borrowing against their primary residence, which typically means living there at least six months a year.
• How much. Usually up to 55% of the home's current value. The amount depends on your age and the age of anyone else on title, the home's type, condition and appraised value, and the lender.
• How you receive it. As one lump sum, as a lump sum followed by further amounts, or as regular payments.
• When it's repaid. When you sell, move out or default, or when the last borrower dies. You can usually repay it at any time, though there may be a prepayment penalty.

An existing mortgage or line of credit on the home may have to be paid off, possibly from the reverse mortgage itself.

What it costs

Rates are usually higher than for a regular mortgage or a home equity line of credit, and there are appraisal, set-up, legal and closing costs. Because the interest is added to what you owe, the balance grows faster over time. As an illustration only: $100,000 borrowed at a 6% rate, compounded yearly with no payments, would grow to about $179,000 after 10 years and about $321,000 after 20.

That growth reduces the equity left for you or your family. When the last borrower dies, the estate usually has a limited time to repay the loan, and settling an estate can take longer than that.

Who offers them

The Financial Consumer Agency of Canada names HomeEquity Bank and Equitable Bank as federally regulated reverse mortgage lenders, and some provincially regulated lenders and mortgage brokers offer them too. Terms differ:

• HomeEquity Bank's CHIP Reverse Mortgage is for homeowners 55 and over with a home appraised at $250,000 or more. You must keep paying property taxes and insurance and maintain the home.
• Equitable Bank lends to homeowners 55 and over in eligible urban centres in BC, Alberta, Ontario and Quebec, requires independent legal advice, and charges a one-time set-up fee.

Ask any lender whether it guarantees that you won't owe more than the home is worth. Equitable Bank, for example, says that if you meet your obligations, the amount owed won't exceed the home's fair market value, apart from fees and interest after the loan comes due. Some lenders require independent legal advice, and it is worth getting even when they don't.

A home equity line of credit

A home equity line of credit (HELOC) usually costs less than a reverse mortgage, but you have to qualify and make payments.

• How much. Up to 65% of your home's value on its own, or up to 80% combined with a mortgage.
• Qualifying. You must pass a stress test at a bank, so you need enough income to qualify.
• Payments. Most HELOCs have a variable rate. You may only have to pay interest, but then the balance never goes down.
• Selling. The line of credit has to be repaid when you sell.

Other options in BC

• Property tax deferment. If you are 55 or older, a Canadian citizen or permanent resident, have lived in BC for at least a year and have at least 25% equity in your principal residence, the Province can pay your property taxes as a loan. You repay it, with interest, when you sell or refinance the home, and in some other cases, such as adding someone to title. For taxes deferred for 2026 and later, the interest is prime plus 2%, compounded monthly.
• The Home Owner Grant. Owners aged 65 or older can claim a larger grant on their principal residence. You have to apply each year.
• Downsizing. Selling and moving to a smaller home can free up equity with no new debt.
• Renting out rooms. Renting rooms in your home, with no structural changes and no depreciation claimed, generally doesn't affect your principal residence exemption. A self-contained suite is different.

I explain the grant and the deferment program in The Home Owner Grant and Property Tax Deferment, and the move to a smaller home in Downsizing in the Tri-Cities.

Before you decide

• Compare the total cost over the years you expect to stay, not just the rate.
• Ask about prepayment penalties, and what happens if you move into care.
• Ask whether there are limits on how you can use the money.
• Talk to your family and a financial advisor, and get independent legal advice.

Questions homeowners often ask me

How much can I borrow with a reverse mortgage?

Usually up to 55% of your home's current value. The amount depends on your age and the age of anyone else on title, your home and the lender.

Do I have to make payments on a reverse mortgage?

No regular payments are needed. The interest is added to the balance, and the loan is repaid when you sell, move out or the last borrower dies.

Is reverse mortgage money taxable?

No. According to the Financial Consumer Agency of Canada, you don't pay tax on the money you borrow, and it doesn't affect Old Age Security or the Guaranteed Income Supplement.

Can I owe more than my home is worth?

Some lenders guarantee that you won't, as long as you meet your obligations, with exclusions for some fees and interest. Ask your lender to show you its guarantee in writing.

Is a HELOC better than a reverse mortgage?

A HELOC usually has a lower rate, but you have to qualify and make at least interest payments. A reverse mortgage needs no payments, but usually costs more, and the balance grows.

Wondering what your home is worth today? Request a free home evaluation, or read how your assessment compares with market value.

This article is general information, not financial, legal or tax advice. For the federal guide, see reverse mortgages.