Your parents need money. What are the actual options?
Most people who look this up aren't the ones who need the money. They're the son or daughter, and the question underneath is usually the same — is this safe, and what does it do to what's left.
Can they lose the house?
Not for missing a payment, because there isn't one. A reverse mortgage in Canada has no required monthly payment. What can trigger a default is narrower than most people expect: not paying the property taxes, letting the home insurance lapse, letting the property fall into serious disrepair, or the home no longer being the primary residence. Those are the obligations. They are worth writing down and checking once a year.
What happens when they die?
The loan comes due. The estate typically has a set window to settle it — usually by selling the home, or by refinancing it if one of the children wants to keep it. The lender does not take the house. The estate sells the house and repays the loan out of the proceeds, the same as it would with any other mortgage.
Does this eat my inheritance?
Yes, partly. That is the real trade-off and nobody should pretend otherwise. Interest accrues instead of being paid monthly, so the balance grows and the equity shrinks. Whether the inheritance actually shrinks depends on whether the home appreciates faster than the interest accrues, and nobody can promise you that it will. What it also does is let your parents stay in the house, and avoid the tax bill that comes with pulling the same money out of a LIRA or RRIF. The comparison worth running is not a reverse mortgage against doing nothing. It is a reverse mortgage against whatever your parents would otherwise use.
What it costs compared to the alternatives
There are four usual ways a retired homeowner raises cash: a withdrawal from a registered account, selling non-registered investments, selling the home, or borrowing against it. Each has a different cost, and the registered withdrawal is the one people underestimate — it is taxed as income in the year they take it. I have set the four side by side on a separate page written for financial advisors.
When it's the wrong call for a family
If your parents are likely to move within a few years. If one parent is under 55. If the family plan is for someone to keep the house. If the amount needed is small and short-term, where a second mortgage or a line of credit is often cheaper. I say no to these files regularly.
The conversation to have first
Before any of this: what is the money actually for, how long does it need to last, and does everyone in the family know. Reverse mortgages arranged quietly, without the adult children knowing, are where the family arguments come from — not because the product failed, but because nobody talked.
Saminder Juneja, Mortgage Broker — Mortgage Centre Canada, independently owned and operated by Get A Better Mortgage Inc., FSRA #10874. Mortgage advice only. Nothing on this page is tax, legal, estate or investment advice. Tax treatment of a registered withdrawal depends on the client's circumstances and should be confirmed with their accountant.