How Reverse Mortgages Could Affect the Great Wealth Transfer (Canada)
Reverse mortgages promise your parents a way to stay in their home after retirement and receive either a lump sum of cash or a monthly income. It's a tempting option, but it’s always a good idea to call a family meeting and get to the bottom of how these things work and what they really cost before a decision is made.
Reverse Mortgages and the Great Wealth Transfer
This article was reviewed by Don Scott, Founder & CEO of Frank Mortgage
KEY TAKEAWAYS
- A reverse mortgage can create extra income in retirement – but it will reduce the homeowner’s wealth and how much they can leave as an inheritance.
- The longer a person benefits from a reverse mortgage, the less money they can leave to their loved ones.
- Choosing a reverse mortgage is more than just a money decision because it affects one’s lifestyle and legacy.
- For some families, a reverse mortgage supports independence; for others, it may weaken inheritance goals.
- The best approach is to compare reverse mortgages with other options to find the right long-term solution for you and your family.
What is a reverse mortgage?
When someone takes out a traditional mortgage, the bank gives them the money they need to buy their home and they spend the next 20 or 25 years paying it back – plus interest. Once they’ve made all the payments, they own their home. That’s that.
A reverse mortgage turns the process around. Hence, the term “reverse.” Some banks are willing to give homeowners a large sum of money, or monthly payments, in the form of a loan so they can keep living in the home they love.
The only caveat? When a person dies, or sells their home, they must pay off the loan balance, including interest, before they can leave any money from the sale to their family. This is important if you are the one hoping to receive a big inheritance that includes the family home.
Below, we break down how reverse mortgages work, the true cost of borrowing against a home, and some alternatives you can discuss with your parents in a family money chat.
What is the Great Wealth Transfer?
The Great Wealth Transfer taking place in Canada refers to all the money and other things of value that are being passed down from one generation to the next. It includes:
- Real estate
- Savings
- Investments
- Businesses
- Life insurance payouts
- Recreational properties
What makes the Great Wealth Transfer so significant is the amount of wealth that has already begun to trickle down, driven in part by the huge growth in the value of family homes and real estate. This is why elderly homeowners may want to look carefully before leaping into a reverse mortgage.
Why reverse mortgages matter in the wealth transfer conversation
When your parents retire, they need to replace the income they made at work with income from other sources. The lucky ones will have money coming in from many places. For example:
- The Canada Pension Plan (CPP)
- Old Age Security (OAS)
- Company pension plans
- Registered retirement savings plans (RRSPs)
- Tax-free savings accounts (TFSAs)
- Non-registered investment and savings accounts
- Income from rental properties or a business
For those with enough income to live comfortably, a reverse mortgage will never be a consideration. But for those who struggle to balance income and expenses, it can be tempting to trade a large nest egg for a more comfortable nest and retirement lifestyle.
Having to make a trade-off between their family’s inheritance and their own financial needs can be emotionally difficult. Below, our experts arm you with the knowledge you need to help your parents make the best decision.
How a reverse mortgage can reduce inheritance
To see how a reverse mortgage reduces the value of inheritance, we have to dig a little deeper into how these things work and look at the role of interest payments on the money your parents receive from the bank.
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- Step 1. Your parent or grandparent must be over 55 and own their home free and clear, meaning they no longer have a mortgage.
- Step 2. They apply for a reverse mortgage at one of the many Canadian financial institutions that offer them
- Step 3. The bank offering the reverse mortgage pays for an independent, licensed real estate appraiser to determine the home’s value. Let’s assume it’s around the average in Ontario: $800,000 (source).
- Step 4. The bank can offer the homeowner up to 55% of the home’s value in the form of a lump-sum payment, monthly payments, or a combination of both. In this example, the maximum value of the loan would be 55 percent of $800,000, meaning $440,000.
| Who chooses a lump sum? | Who chooses monthly payments? | Who chooses a combination? |
|---|---|---|
| Someone who wants to pay off a lot of high-interest debt and start fresh might want the full amount of their reverse mortgage loan up front. | Someone who needs to supplement their income would probably take their reverse mortgage loan amount in monthly installments. | Someone who can easily meet their retirement income needs by paying off a few higher-interest debts, like credit cards, before they start receiving monthly payments. They take a lump sum up front to wipe out debt, and then settle in to monthly payments that top up their income. |
- Step 5. The bank begins charging interest on the amount of money they give to the homeowner. Unlike regular mortgage payments, these interest charges do not get paid on a monthly basis. They simply accumulate and only become due when the homeowner dies or sells the home.
- Step 6. Upon the homeowner’s death or the sale of the home, the bank is owed all the money it lent (up to 55% of the home’s value) PLUS all the interest charges that added up over the years.
The fallout of a reverse mortgage
The bank that issued the reverse mortgage loan is entitled to receive all of the money they lent your parents plus the interest that added up over the years. Whatever is left over can still be added to your inheritance. But that doesn’t mean it’s always the best idea.
Situations where a reverse mortgage may support family goals
Sometimes, life demands immediate solutions to financial challenges. A reverse mortgage is a tool that can be used to create an opportunity while solving a problem. Here are a few examples of when and how a reverse mortgage can support your family goals.
Avoid selling at the wrong time
Selling the family home when prices are low means less money for everyone. A reverse mortgage could be a temporary solution that gives the homeowner an income. If prices were to go back up quickly, and the home gets sold for a large profit, the loan could be paid off early – with minimal interest.
Paying for renovations
Renovating a home to improve mobility may be the only way for some older people to age in place. A small reverse mortgage could cover the cost.
Extending the life of other investments
The income from a reverse mortgage allows your parents to take less money from things like their retirement savings plan (RRSP) or put off applying for the Canada Pension Plan (CPP) until age 70, when payments are significantly higher.
This easy-to-use calculator helps you compare the amount of CPP benefits based on when you start receiving payments and how long you expect to live.
Helping parents stay independent
If aging in place is what they want to do, a reverse mortgage can help seniors stay independent for as long as possible.
Allowing savings to keep growing
If a home is unlikely to increase in value due to location, for example, it may be better to let other assets increase over time and live on the income from a reverse mortgage. This is a balancing act you should explore with a qualified advisor.
Early inheritance
Parents who are house-rich but don’t have much cash on hand can give their adult children the tax-free proceeds of a reverse mortgage as a form of early inheritance. For example, gifting money to an adult child to be used as a down payment may have a much greater effect on their lifetime wealth-building potential.
Because the higher down payment will lower the cost of homeownership over decades, the savings – along with increased home value – will offset interest charges on the reverse mortgage. For some people, it’s a clever and rewarding strategy.
Risks and trade-offs families should understand
Parents want to leave as much as they can to their children and grandchildren. That’s normal. A wealth transfer plan that everyone agrees to will go a long way to helping you avoid these risks.
Reduced value of inheritance
Having to repay a reverse mortgage affects how much money is left over when your parents sell their home. It will be less of an impact if the home has increased in value, which is often the case when timing and location are on your side.
Less flexibility to borrow later
Committing to a reverse mortgage can limit your parents’ ability to borrow in other ways, like a Home Equity Line of Credit (HELOC), for example.
Higher cost than necessary
It would be heartbreaking to learn too late that there was a more affordable alternative to aging in place. Explore every option, as a family, before committing to a reverse mortgage. As an example, here is the relative cost* of alternative options.
- Private mortgages: 8% to 15% or more
- Unsecured line of credit: 7% to 9%
- Typical reverse mortgage: 6.5%
- Home equity line of credit: 5.0% to 7.0%%
- Mortgage taken out by adult children: 3.5% to 4.5%
*Rates are estimates as of September 2026.
An adult child could take out a mortgage on their home to buy a portion of the family home. This type of strategy should be discussed with a qualified expert.
Emotional shocks
Loved ones expecting an inheritance may be making their own financial plans based on what they think they will inherit. They could be devastated to discover that a reverse mortgage balance is going to wipe out the value of the family home.
Family feuds
When parents do not clearly explain their wishes, there is always the potential for family conflict over who gets what. If everyone understands the role of a reverse mortgage within a wealth transfer plan, it’s much easier on everyone.
Reverse mortgages vs alternatives
Below we compare the upsides, downsides, and financial impacts of reverse mortgages on family wealth transfer. The intent is to introduce some alternatives that you and your family can review together. The right answer for you may be a combination of these ideas. The best way to decide is to consult an expert with experience in wealth and tax planning.
| Reverse Mortgage | |
|---|---|
| Best for | Older Canadians in need of a one-time lump sum of cash, additional retirement income, or a combination of both. |
| Upside | Money given to the homeowner is tax-free, and there are no monthly payments on a reverse mortgage. So homeowners don’t have to budget for that expense. In most cases, the tax-free cash coming in should provide additional spending money. |
| Downside | In addition to the money borrowed, interest is charged and it adds up over time. |
| Impact on inheritance | The bank must be repaid in full (amount borrowed plus interest) before the home can be sold and the profit shared with family members. If real estate values rise sharply throughout the life of the loan, the increase in value could help offset the cost of the loan. For example, some Ontario locations saw home values more than double from 2013 to 2023 (source). |
| Home Equity Line of Credit (HELOC) | |
|---|---|
| Best for | Homeowners who need access to credit from time to time and have the ability to pay it off with their current income. |
| Upside | The bank provides access to credit, up to a maximum amount. Homeowners can borrow up to the maximum and pay it back at any time. Interest is charged on the outstanding balance each month. |
| Downside | You have to make at least the minimum payment every month, and interest rates on lines of credit are higher than standard mortgages. So you need to budget for that expense and accept the higher cost of borrowing. Making only the minimum payment will result in large interest payments over time. |
| Impact on inheritance | The balance owing on the HELOC needs to be paid off when the homeowner dies. This might not be a burden if the home has risen in value, making it a great trade-off. |
| Downsizing | |
|---|---|
| Best for | People who stand to make a profit on their sale of their current home by moving to a more affordable option. |
| Upside | Downsizing can do two things: Lower monthly expenses and put some money in the bank. |
| Downside | Moving away from friends and a neighbourhood you love can have an emotional and financial impact on seniors. Plus, transfer taxes, real-estate fees, and closing costs can eat up a lot of the profit from the sale. Here’s how to estimate the true cost of buying a new home. |
| Impact on inheritance | Retiring with lower expenses and more money in the bank should make it easier to leave a large inheritance to your loved ones. |
| Drawing from investments | |
|---|---|
| Best for | Anyone who can generate enough investment income without having to borrow against their home through a reverse mortgage. |
| Upside | Based on the popular 4% rule, if a retiree can cover expenses by only withdrawing 4 percent of their investment income a year, they should be able to avoid needing a reverse mortgage. |
| Downside | Investment income alone may not be enough to cover unexpected expenses like a repair or a sudden bill. |
| Impact on inheritance | Investment income alone may not be enough to cover unexpected expenses like a repair or a sudden bill. |
| Permanent life insurance | |
|---|---|
| Best for | Anyone who is able to start paying the cost of a permanent life insurance policy as soon as possible. |
| Upside | The cash portion1 of a permanent life insurance policy can provide tax-advantaged access to cash in the form of policy loan. The loan can be paid back on your own timeline. |
| Downside | Policy loans2 and other forms of withdrawal will come with a higher interest rate, or in the event you don’t pay it back, will reduce the death benefit your beneficiaries will receive. |
| Impact on inheritance | Permanent life insurance guarantees your loved ones a tax-free payout. This makes it easier, and less emotional, for some homeowners to accept that a reverse mortgage will have to be paid off when they die. |
What happens when the homeowner passes away?
When someone who has taken out a reverse mortgage dies, the bank is entitled to the amount of money they lent, plus interest. Here’s a simplified example of how a reverse-mortgage lender would calculate the amount owing.
When the reverse mortgage was a lump sum
Let’s assume that an elderly Canadian widow owned a home worth $750,000 and took out a reverse mortgage for 55 percent of its value. She took the entire amount as a lump sum and died five years later.
| Value of the home five years ago | $750,000 |
|---|---|
| Value of the reverse mortgage given to the homeowner as a lump sum (55% - the maximum allowed) | $412,500 |
| Interest charges for five years at 7.5% | $180,251 |
| Amount the bank is owed after five years | $592,751 |
| Money left over to form an inheritance, assuming the home has not increased in value | $157,249 |
However, if the value of the home increased by just 4 percent3over the five-year life of the loan, it would be worth about $912,000, meaning the amount available for inheritance would rise to $326,3004.
When the reverse mortgage was taken out as a monthly payment
Had the same homeowner taken a reverse mortgage for the same amount and opted for monthly payments, their age would be a major factor in determining how much they get and interest charges would only apply to the amount outstanding. For simple illustration, let’s assume the homeowner is 72 years of age and would like to receive income for the next 20 years.
| Value of the home five years ago | $750,000 |
|---|---|
| Value of the reverse mortgage (55% - the maximum allowed). Interest is not charged on the full amount. It’s applied to each payment the borrower receives. | $412,500 |
| Monthly payment of around $3,300 for five years (60 months of the 240 months in 20 years) assuming 7.5% interest calculated monthly. This is the amount of money paid tax-free to the borrower. | $198,000 |
| Amount of money owed to the lender (payments plus interest) | $239,339.40 |
| Money left over to form an inheritance, assuming the home has not increased in value (home value minus payments and interest due to the lender) | $510,660.60 |
Note: Actual lender balances will vary slightly because of fees, compounding conventions, and payment timing.
In this case, a 3 percent increase in the home’s value over five years would make it worth $1,159,000. After paying off the $243,000 owed to the lender, there would be roughly $916,000 before taxes and fees left for inheritance5.
As you can see, there is a much bigger impact on the amount of inheritance based on whether a reverse mortgage is taken as a lump sum or monthly payments and how long interest is allowed to grow.
Can life insurance help preserve intergenerational wealth?
At the time your parent or grandparent took out a reverse mortgage, it solved a money problem. They needed a lump sum of cash, monthly payments, or some combination of both.
Fast forward to the time they die. Obviously, the bank deserves to get its money back. But if not much time passed, and interest charges were not allowed to increase by very much, there could be an opportunity for a family member to purchase the family home by paying off the bank loan. This is a fantastic opportunity if the home increased in value over the life of the reverse mortgage.
The death benefit from a permanent life insurance policy, such as whole life insurance, could provide the next generation with the money (tax-free) they need to put a down payment on a new mortgage, using the money to pay off their parents’ debt. It could also help them deal with any of the delays, complications, or unexpected fees.
How to decide if a reverse mortgage fits your legacy plan
Reverse mortgages seem like a simple solution to a complicated problem. All the talk of a regular tax-free income and no monthly payments sounds great when someone feels they have no other option for aging in place.
6 questions to ask before you take out a reverse mortgage
- What is your goal? This sounds obvious but if you are giving up a portion of your home’s value for something frivolous, like a boat or a bucket-list vacation, it may not make sense.
- How long do you expect to live in your home? Most people say forever. But changes to your health, the desire to downsize, or the need to be more social may motivate you to move sooner than expected.
- What are your other options? Could you generate income from another source, like getting a roommate or housing students throughout the year? Lots of people do it.
- Is preserving inheritance a top priority? If you don’t have children, or they’re already on the road to financial security, leaving an inheritance may not be as important as the joy of aging in place.
- Have you discussed the plan with your family? Sharing your thoughts with your family may reveal alternatives you never considered. For example, your adult children might be able to refinance the home in their name in exchange for guaranteed ownership later.
- Have you reviewed your entire financial plan? The income from a reverse mortgage is not a complete solution. You should review your entire financial situation with a qualified expert to see if there is a role for solutions like life insurance to help protect the value of an inheritance.
Whether you’re the parent considering a reverse mortgage or the adult child hoping to inherit the family home, these questions can easily become the starting point for a family money chat about the Great Wealth Transfer and how it affects you.
Read part 1 of the series
Read part 2 of the series
Why choose Serenia Life for guidance on how life insurance can play a role in the Great Wealth Transfer?
Although Serenia Life does not offer reverse mortgages, we can help you explore ‘outside of the bank’ options for transferring wealth to your kids in tax-effective ways. We can also help you run the numbers ahead of ‘the talk’ with your family to truly understand your income needs in retirement. Let’s chat before you make any big decisions about retirement income and the legacy you plan to leave.
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Want to learn more about reverse mortgages and the intergenerational wealth transfer?
Canadian Senior Moment
If you’re old enough to remember the hit TV show ‘The Golden Girls,’ it won’t surprise you that some seniors are teaming up with roommates to help cover the high cost of aging in place. Check it out:Shared living in retirement: Is a roommate the answer to Canada’s housing squeeze?
Government of Canada
Learn more about how to pay off a reverse mortgage and the fees that may apply: Reverse Mortgages
People Magazine
A gentle reminder that inheritance is not guaranteed: Why Francis Ford Coppola Risked $120 Million of His Wealth Funding a Movie: ‘Money Doesn’t Matter’
Serenia Life Financial
This helpful guide includes a discussion of family trusts and how setting money aside today can give your loved ones access to instant cash: The Great Wealth Transfer – How to Prepare for What’s Next
Service Canada
Watch this 2-minute video for an introduction to the Canada Pension Plan (CPP), how it works, and the advantages of applying for payments until you reach age 70: The CPP Retirement Pension — Working and the Canada Pension Plan
Reviewer credentials
Don Scott has worked in the Canadian mortgage industry for over 30 years, and is the founder of Frank Mortgage, an online mortgage brokerage that is focused on improving access to mortgages for Canadians and committed to making the mortgage journey easier and less stressful. They use technology to streamline the process while keeping the focus on what matters most: providing clear information, honest guidance, and a solution that fits customer needs. Learn more >
Disclaimers
This blog post contains general information only. Because each person’s situation is unique, it is best to speak with a qualified professional before making any final decisions. Serenia Life Financial does not advise clients on tax, accounting, or legal matters.
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1Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.
2Policy loan is an easy way to access the accumulated cash value of the policy. A variable interest is charged on the amount borrowed. This may result in taxable consequences. Loan can be repaid at any time. Upon death and the loan is unpaid, the outstanding balance including any accumulated interest will be deducted from the total death benefit, with the remainder paid tax free to the beneficiary(ies).
3Four percent was chosen for illustration purposes only, based on a rough average of 5 percent increases between 2020 and 2025. Location, type of dwelling, interest rates and many other factors will apply to each person’s situation. A reverse mortgage should never be taken with the assumption that asset growth will minimize the long-term cost.
4This example does not include the cost of selling real estate, such as closing costs, other fees, and transfer taxes.
5This example does not include the cost of selling real estate, such as closing costs, other fees, and transfer taxes.
