How Does a Reverse Mortgage Work?

Practical mechanics, tax treatment, and what happens at the end

A reverse mortgage is structured differently from traditional borrowing. Understanding how funds are received, how interest works, and when repayment occurs is essential before considering whether it fits into a long-term retirement plan.

This page explains the practical mechanics of a reverse mortgage within the Canadian context.

Accessing Home Equity

Key points to understand:

A reverse mortgage allows eligible Canadian homeowners aged 55 and older to access a portion of their home’s value as cash, while continuing to live in and own the home.

The amount available depends on age, property type, location, and lender criteria

Borrowing is commonly capped at up to 55% of the home’s appraised value

Homeowners remain on title and retain ownership

Funds may be received as:

A lump sum

Monthly advances

Or a combination of both

No Monthly Mortgage Payments

No Monthly Mortgage Payments Unlike traditional mortgages, reverse mortgages do not require regular monthly payments.

Interest accrues over time
Interest is added to the outstanding balance
Payment is typically deferred until the mortgage end

Homeowners may choose to make voluntary payments in some cases, but this is not required.

Tax Treatment in Canada

In most situations, funds received from a reverse mortgage are considered loan proceeds, not income.

As a result:

Funds are typically received as tax-free cash

They generally do not affect income tax reporting

Individual circumstances may vary, and tax rules can change. Confirming tax treatment with a qualified professional is always recommended.

Government Benefits

Because reverse mortgage proceeds are usually not treated as income, they generally do not affect income-tested government benefits such as:

Old Age Security (OAS)
Guaranteed Income Supplement (GIS)

However, benefit eligibility depends on many factors, and program rules may change over time.

How Interest Accrues

Interest on a reverse mortgage:

Accrues over time

Is commonly compounded semi-annually (standard in Canada)

Applies only to funds actually withdrawn

The long-term impact of interest depends on:

How long the mortgage is held

When funds are accessed

Changes in home value over time

Understanding this interaction is key to evaluating suitability.

What Happens When a Reverse Mortgage Ends?

A reverse mortgage typically becomes due when:

The home is sold
The homeowner permanently moves out
All homeowners on title pass away

At that point, the outstanding balance — including accrued interest — must be repaid.

What the Estate Needs to Know

When a reverse mortgage ends:

The home does not automatically transfer to the lender
The estate generally controls the property and next steps
Heirs may choose to:
- Sell the home
- Repay the balance using other assets
- Refinance the mortgage

Any remaining equity typically belongs to the estate
Canadian reverse mortgages are generally non-recourse, meaning the amount owed is typically limited to the value of the home, subject to lender terms.

A Practical Perspective on Rates

A reverse mortgage works best when evaluated as part of a broader financial and retirement plan. Understanding the mechanics helps homeowners ask better questions, assess alternatives, and decide whether further professional advice is appropriate.

Calculators

TheREVERSEMORTGAGE.ca

Real Retirement, Real Freedom

How Does a Reverse Mortgage Work?

Accessing Home Equity

Key points to understand:

A reverse mortgage allows eligible Canadian homeowners aged 55 and older to access a portion of their home’s value as cash, while continuing to live in and own the home.

Funds may be received as:

No Monthly Mortgage Payments

No Monthly Mortgage Payments Unlike traditional mortgages, reverse mortgages do not require regular monthly payments.

Homeowners may choose to make voluntary payments in some cases, but this is not required.

Tax Treatment in Canada

In most situations, funds received from a reverse mortgage are considered loan proceeds, not income.

As a result:

Individual circumstances may vary, and tax rules can change. Confirming tax treatment with a qualified professional is always recommended.

Government Benefits

Because reverse mortgage proceeds are usually not treated as income, they generally do not affect income-tested government benefits such as:

How Interest Accrues

Interest on a reverse mortgage:

The long-term impact of interest depends on:

Understanding this interaction is key to evaluating suitability.

What Happens When a Reverse Mortgage Ends?

A reverse mortgage typically becomes due when:

At that point, the outstanding balance — including accrued interest — must be repaid.

What the Estate Needs to Know

When a reverse mortgage ends:

Any remaining equity typically belongs to the estate
Canadian reverse mortgages are generally non-recourse, meaning the amount owed is typically limited to the value of the home, subject to lender terms.

A Practical Perspective on Rates

A reverse mortgage works best when evaluated as part of a broader financial and retirement plan. Understanding the mechanics helps homeowners ask better questions, assess alternatives, and decide whether further professional advice is appropriate.

Costs & Fees

Rates & Penalties

How Reverse Mortgages Work

Send me a FREE copy of Ron's book. My Email is:

How Does a Reverse Mortgage Work?

Accessing Home Equity

Key points to understand:

A reverse mortgage allows eligible Canadian homeowners aged 55 and older to access a portion of their home’s value as cash, while continuing to live in and own the home.

Funds may be received as:

No Monthly Mortgage Payments

No Monthly Mortgage Payments Unlike traditional mortgages, reverse mortgages do not require regular monthly payments.

Homeowners may choose to make voluntary payments in some cases, but this is not required.

Tax Treatment in Canada

In most situations, funds received from a reverse mortgage are considered loan proceeds, not income.

As a result:​

Individual circumstances may vary, and tax rules can change. Confirming tax treatment with a qualified professional is always recommended.

Government Benefits

Because reverse mortgage proceeds are usually not treated as income, they generally do not affect income-tested government benefits such as:

How Interest Accrues

Interest on a reverse mortgage:

The long-term impact of interest depends on:

Understanding this interaction is key to evaluating suitability.

What Happens When a Reverse Mortgage Ends?

A reverse mortgage typically becomes due when:

At that point, the outstanding balance — including accrued interest — must be repaid.

What the Estate Needs to Know

When a reverse mortgage ends:

Any remaining equity typically belongs to the estate​ Canadian reverse mortgages are generally non-recourse, meaning the amount owed is typically limited to the value of the home, subject to lender terms.

A Practical Perspective on Rates

A reverse mortgage works best when evaluated as part of a broader financial and retirement plan. Understanding the mechanics helps homeowners ask better questions, assess alternatives, and decide whether further professional advice is appropriate.

Costs & Fees

Rates & Penalties

How Reverse Mortgages Work

Send me a FREE copy of Ron's book. My Email is:

As a result:

Any remaining equity typically belongs to the estate
Canadian reverse mortgages are generally non-recourse, meaning the amount owed is typically limited to the value of the home, subject to lender terms.