🇨🇦 Canada · 5 min read · Published 2026-09-07 · Updated 2026-09-07

Written by Jordan Reeves · Editorial review: automated source and figure checks (how we check this)

Sources last verified: 2026-09-07

How Does a Reverse Mortgage Work in Canada?

You borrow against the equity in your home and make no payments while you live there. Interest accrues and compounds against the balance, which is settled when the home is sold, you move permanently, or you die. The money received is a loan, so it is not taxable income.

60-SECOND ANSWER

A reverse mortgage is untaxed borrowing against home equity, with compounding interest settled when the home is eventually sold.

The answer:: Borrowing against your home with no payments while you live there, settled from the proceeds when the property is sold.
The trap:: Underestimating the compounding. No payments means interest accrues on interest for as long as the loan lasts.
The recommendation:: Compare it against a home equity line of credit first, because the rate is lower where payments are affordable.

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Where the AI summary above gets this wrong

"A reverse mortgage means the bank takes your house."

That's surface-true. Here's what it misses:

Title stays with the homeowner — The lender registers a charge, as with any mortgage. Ownership does not transfer and the homeowner can sell at any time.
The proceeds are not taxable — It is borrowed money, so it does not enter net income and does not affect the OAS recovery tax or the Guaranteed Income Supplement.
Rates are above a conventional mortgage — The absence of payments and the guarantee against negative equity are priced into the rate.

→ See what a compounding balance grows to

01 What the arrangement is

A reverse mortgage is a loan secured against your principal residence, available from a stated age, with the amount limited by your age, the property and its value. No payments are required while you live in the home.

Title remains with you throughout. The lender registers a charge in the ordinary way, and the loan is repaid from the proceeds when the home is sold, when you move permanently into care, or on death.

Source: Principal residence and other real estate

02 What the compounding costs

Because nothing is paid during the term, interest accrues on the accumulated balance year after year. A rate above a conventional mortgage applied to a growing balance is what makes a modest initial advance a substantial claim after fifteen years.

Whether that matters depends on what the equity is for. Where the home is intended as an inheritance, the erosion is the whole cost; where it is intended to fund a retirement, the erosion is the point. The alternative of selling is in downsizing in retirement.

WORKED EXAMPLE · Try the numbers

Shows: what an amount becomes after your chosen number of years at a fixed return. Ignores: tax, fees, inflation, and any variation in returns from year to year.

Amount today ($)

Years

Return (%/yr)

Value at the end of the period

$57,435

$10,000 left for 30 years at 6% becomes $57,435 — the growth is 83% of the total.

Source: Principal residence and other real estate

03 Why it interacts well with benefits

Borrowed money is not income. A reverse mortgage advance does not enter net income, so it does not reduce the Guaranteed Income Supplement, does not trigger the Old Age Security recovery tax, and does not affect the age amount.

That makes it genuinely useful for a low-income homeowner whose alternative is a RRIF withdrawal that would reduce benefits at a steep effective rate — the mechanism is in GIS eligibility.

Taking the advance in instalments rather than as a lump sum reduces the compounding considerably, because interest only runs on what has actually been drawn. Most lenders offer that structure and few borrowers ask for it, which is the single cheapest change available to anyone using the product.

Source: Interest and other investment income (line 12100)

The honest framing is that this converts an inheritance into current income, at a price. For a homeowner with no heirs and a small RRIF that is often a good trade. For one intending to leave the house to their children it is a decision the children should be part of.