One of the most common concerns Canadians have about reverse mortgages is interest rates. Unlike traditional loans, reverse mortgages don’t require monthly payments — so how does interest actually work? And will it eat up your home equity?

Whether you're considering a CHIP Reverse Mortgage or just doing your homework, understanding how interest rates apply can help you make a confident and informed decision. Let’s break it all down in plain language.

What Makes Reverse Mortgage Interest Rates Unique?

With a traditional mortgage or line of credit, you make regular monthly payments that include principal and interest. With a reverse mortgage, you don’t make monthly payments — which means the interest is simply added to your loan balance each month. This is called “compounding interest.”

As a result, your loan balance grows over time. But here’s the good news: your home equity can still grow too, especially if your home’s value increases over the years.

Types of Reverse Mortgage Interest Rates in Canada

There are two types of interest rates available when applying for a reverse mortgage in Canada:

• Fixed Interest Rate
  With a fixed rate, your interest rate remains the same for a specific term — often six months, one year, three years, or five years. This offers predictability and makes it easier to understand how your loan balance will grow over time.
  

Best for: People who want long-term stability and peace of mind.

• Variable Interest Rate
  A variable rate changes with the prime lending rate, meaning your interest rate may go up or down depending on market conditions. The upside is that these rates often start lower than fixed rates — but they can increase if interest rates rise nationwide.

Best for: Homeowners who prefer flexibility or expect to repay the loan in a shorter time frame.

How Is the Rate Determined?

Reverse mortgage interest rates are set by your lender, often based on the Bank of Canada’s overnight rate, market conditions, and internal risk assessments. The rate you’re offered will also depend on:

• The term you choose (e.g., 6 months vs 5 years)

• Your property location and type

• Whether you choose a lump sum, monthly payment, or line of credit

• Whether you opt for a fixed or variable product

How Interest Affects Your Home Equity

Many homeowners worry that compounding interest will eliminate all their home equity — but that’s rarely the case. Here’s why:

• Most reverse mortgage borrowers still retain 50% or more of their equity by the time the loan is repaid.

• If your home’s value continues to increase, it helps offset the interest costs.

• Federally regulated lenders like HomeEquity Bank include a No Negative Equity Guarantee — meaning you or your estate will never owe more than your home’s fair market value at the time of sale.

Let’s Look at a Simple Example

Let’s say you’re 70 years old and take out a $200,000 reverse mortgage on your fully paid-off $600,000 home at an interest rate of 6%.

• After 10 years, your loan balance would grow to around $358,000 due to interest.

• If your home increases in value to $800,000 during that time, you’d still retain approximately $442,000 in home equity.

(These are approximate numbers for illustrative purposes only — talk to an advisor for a personalized estimate.)

Are Interest Rates Higher Than Traditional Mortgages?

Yes, reverse mortgage rates are generally higher than traditional mortgage rates. That’s because you’re not making regular payments, so the lender is taking on more risk. However, the trade-off is flexibility, tax-free income, and the ability to stay in your home.

How to Compare Rates

When comparing reverse mortgage rates, be sure to look at:

• The posted rate (fixed or variable)

• The APR (Annual Percentage Rate), which includes all fees

• Any term limits or early repayment penalties

• The lender’s reputation and support

You can also request a personalized quote to see how different terms might affect your future balance and equity.

Final Thoughts

Reverse mortgage interest rates may sound complicated at first — but they don’t have to be. The key is to understand how they work, weigh the pros and cons of fixed vs variable, and choose the structure that aligns with your goals and timeline.

At Legacy Unlocked, we’re here to walk you through it all. Whether you’re exploring your options or ready to move forward, we’ll help you find a reverse mortgage plan that makes financial sense — and gives you peace of mind in retirement.

Ready to learn more? Speak with a licensed advisor today or request your personalized estimate.

References:

1. HomeEquity Bank. (2023). CHIP Reverse Mortgage Interest Rate Options. https://www.chip.ca

2. Ratehub.ca. (2023). Reverse Mortgage Rates in Canada. https://www.ratehub.ca

3. Financial Consumer Agency of Canada. (2022). Understanding Reverse Mortgage Costs.https://www.canada.ca