One of the first differences homeowners notice when reviewing a reverse mortgage is the interest rate. Reverse mortgage rates in Canada are higher than those of traditional mortgages and, in many cases, higher than HELOC rates as well. This difference is not arbitrary. It reflects how reverse mortgages are structured and the risks lenders take on by deferring repayment. This guide explains why reverse mortgage interest rates are higher, how they work, and what that means for homeowners over time.
How Reverse Mortgage Interest Rates Work
Reverse mortgage interest is compounded, meaning interest is added to the loan balance regularly and future interest is calculated on that growing amount. Because no monthly payments are required, the balance increases over time until the loan is repaid. This compounding structure is a key reason why understanding interest rates is especially important for reverse mortgages.
Deferred Repayment and Lender Risk
Traditional mortgages are repaid monthly, which steadily reduces the lender’s exposure. With a reverse mortgage, repayment may not occur for many years. The lender must wait until the home is sold or the borrower leaves the property permanently. This long deferral increases uncertainty around repayment timing and amount, which is reflected in higher interest rates.
Longevity and Timing Uncertainty
When a reverse mortgage is issued, the lender cannot predict exactly how long the loan will remain outstanding. Borrowers may live in the home for many years, during which interest continues to compound. The longer the loan lasts, the greater the balance growth. This longevity risk contributes to higher pricing compared to loans with fixed terms.
Home Value Risk
Reverse mortgages are repaid from the value of the home at sale. While Canadian reverse mortgages include a no negative equity guarantee, lenders still face risk if home values stagnate or decline over time. This market risk is built into interest rate pricing to protect against future uncertainty.
No Monthly Payment Requirement
Because borrowers are not required to make monthly payments, lenders do not receive ongoing cash flow to offset interest risk. In contrast, traditional mortgages generate regular payments that reduce principal and interest exposure. The absence of payments shifts more risk to the lender and influences rate levels.
Comparison to Traditional Mortgage Rates
Traditional mortgage rates are lower because repayment is structured, time-limited, and supported by income qualification. Borrowers reduce the balance with each payment. Reverse mortgages remove these protections for the lender, leading to higher rates that account for extended duration and compounding.
Comparison to HELOC Rates
HELOC rates are usually lower than reverse mortgage rates because borrowers must make payments and qualify based on income and credit. HELOC balances can be repaid and reduced over time. Reverse mortgages do not require income qualification or payments, which increases lender exposure and pricing.
Fixed vs Variable Rate Structures
Some reverse mortgages offer fixed or variable rate options depending on the lender. Regardless of structure, rates are higher than traditional mortgages because the underlying risk profile remains the same. Understanding how rates are applied and compounded helps homeowners evaluate long-term cost.
How Higher Rates Affect Long-Term Cost
Higher interest rates combined with compounding can significantly increase the loan balance over time. While this may be acceptable for homeowners prioritizing cash flow and housing stability, it reduces remaining equity and impacts estate value. Evaluating how rate levels affect balance growth is essential.
Transparency and Disclosure
Canadian lenders are required to disclose interest rates, compounding frequency, and repayment conditions. Reviewing these disclosures carefully helps homeowners understand how rates work in practice and how costs accumulate over time.
Weighing Cost Against Benefit
Higher interest rates do not automatically make a reverse mortgage unsuitable. For some homeowners, the benefit of eliminating monthly payments and accessing equity outweighs the long-term cost. The decision depends on individual priorities, income stability, and housing plans.
Final Thoughts
Reverse mortgage interest rates are higher because the loan structure transfers more risk to the lender through deferred repayment, compounding, and uncertainty. Understanding why rates are priced this way helps homeowners and families evaluate the true cost and decide whether the trade-off aligns with their financial goals.
Note: Rates and costs vary based on your credit profile, available equity, and location.