Using a Reverse Mortgage to Support Adult Children or Grandchildren Financially

When I first heard my neighbour Margaret mention she'd helped her daughter with a down payment using her reverse mortgage, I was intrigued. At 68, she'd found a way to remain in her beloved Toronto home while still giving her daughter a leg up in Canada's challenging housing market. "It just made sense," she told me over tea. "The money was sitting in my walls doing nothing, while my daughter was struggling to get on the property ladder."

Margaret's story isn't unique. With Canada's soaring housing costs and economic pressures facing younger generations, many seniors are exploring ways to support their adult children and grandchildren financially. One increasingly popular option? The reverse mortgage.

What Exactly Is a Reverse Mortgage and How Does It Work?

A reverse mortgage allows homeowners aged 55 and older to access up to 55% of their home's value without having to sell or move. Unlike a traditional mortgage, you don't make regular payments—instead, the loan and accumulated interest are repaid when you sell your home, move out, or pass away.

The beauty of a reverse mortgage is that the money is tax-free and can be used however you wish—including helping your adult children or grandchildren. You maintain ownership of your home and benefit from any future appreciation.

Here's how the process typically works:

1. You apply with a reverse mortgage provider
2. The lender assesses your home's value, your age, and location
3. You can receive the funds as a lump sum, regular payments, or a combination
4. The loan amount plus interest is repaid when you sell your home or pass away

"I was skeptical at first," admits Tom, a 72-year-old from Mississauga who used a reverse mortgage to help his grandson start a business. "But once I understood I could stay in my home and the loan would only be repaid when I no longer needed the house—it became a straightforward decision."

Why Consider Using a Reverse Mortgage for Family Support?

In today's economic climate, younger Canadians face unprecedented financial challenges. Housing prices in major Canadian cities have far outpaced income growth, student debt has reached record levels, and the cost of living continues to climb.

For many seniors who are "house rich but cash poor," a reverse mortgage offers a way to support family members without uprooting their own lives or significantly impacting their retirement lifestyle.

Common ways seniors use reverse mortgages to support family include:

• Providing down payments for first homes
• Funding education costs
• Helping with debt consolidation
• Supporting a business venture
• Covering medical expenses or emergency needs
• Contributing to wedding costs or other major life events

"The joy of watching my grandchildren graduate university without crushing debt was worth every penny of interest on my reverse mortgage," shares Patricia, a 70-year-old homeowner from Vancouver.

What Are the Disadvantages of a Reverse Mortgage?

While reverse mortgages can provide valuable financial flexibility, they're not without drawbacks. Being transparent about these is essential before making such a significant financial decision.

Higher interest rates are the most notable disadvantage. Reverse mortgages typically carry interest rates 1-2% higher than traditional mortgages. This means your equity decreases faster than with conventional financing options.

Other potential disadvantages include:

• Reducing your estate's value: Less inheritance will be available to your heirs
• Fees and closing costs: Setup costs can be substantial
• Complexity: The terms and conditions require careful review
• Potentially affecting benefits: May impact eligibility for certain income-tested benefits

"I made sure my children understood that helping them now meant less inheritance later," explains David, who used a reverse mortgage to help his son through a financial crisis. "But we agreed that providing help when it was most needed made more sense than waiting."

What Is the 95% Rule on a Reverse Mortgage?

One common question concerns the protection of homeowners from owing more than their home is worth. The 95% rule (or "no negative equity guarantee") is an important safeguard offered by Canadian reverse mortgage providers.

This guarantee ensures that regardless of how long you have the mortgage or what happens to housing prices, you or your estate will never owe more than 95% of your home's fair market value when the loan becomes due.

This provides significant peace of mind for homeowners worried about burdening their heirs with debt. If housing prices drop dramatically or you live much longer than expected, the most that would ever need to be repaid is 95% of what your home sells for.

How Much Equity Is Needed for a Reverse Mortgage?

The amount you can borrow depends on several factors:

• Your age (and your spouse's age)
• Your home's appraised value
• Your home's location
• The condition of your property
• Current interest rates

Generally, the older you are, the more you can borrow. Most Canadian homeowners can access between 15-55% of their home's value. The minimum home value typically needs to be at least $250,000, though this varies by lender and location.

"I was pleasantly surprised that at 75, I qualified for more than I needed," says Ruth from Ottawa. "This allowed me to help both my daughter with her small business and keep some funds for my own future needs."

Is a Reverse Mortgage a Good Idea in Canada?

Whether a reverse mortgage makes sense depends entirely on your specific circumstances. For seniors who want to remain in their homes while supporting family members financially, it can be an excellent solution.

It might be a good option if:

• You plan to stay in your home long-term
• You have significant equity but limited cash flow
• You want to help family members without giving up your home
• You're comfortable with reducing your estate's eventual value
• You've explored other options and found them less suitable

However, if passing on maximum home equity to heirs is your priority or if you might move soon, other options might serve you better.

What Is Better Than a Reverse Mortgage?

Before committing to a reverse mortgage, it's worth exploring alternatives that might better suit your goals:

• Home Equity Line of Credit (HELOC): Typically offers lower interest rates but requires regular minimum payments
• Downsizing: Selling and moving to a less expensive home frees up equity without ongoing interest costs
• Traditional mortgage refinancing: May offer better rates if you can manage the payments
• Family loans or arrangements: Some families create their own internal financing arrangements
• Government assistance programs: Various provincial and federal programs may provide support

"We actually considered selling and moving in with our daughter," shares Michael from Halifax. "But after looking at all options, a reverse mortgage gave us both financial and emotional independence while still helping her financially."

How Much Can You Borrow on a Reverse Mortgage?

The maximum amount available through a reverse mortgage in Canada typically ranges from 15% to 55% of your home's appraised value. The exact amount depends on:

• Your age and your spouse's age (older borrowers can access more)
• Your home's current market value
• Your property's location (urban properties often qualify for higher amounts)
• Current interest rates
• Your home's condition

For example, a 70-year-old Toronto homeowner with a $1 million property might be eligible to borrow between $300,000 and $400,000, depending on specific circumstances and the lender's criteria.

What Is the Age Limit for a Reverse Mortgage?

In Canada, the minimum age requirement for a reverse mortgage is 55. Both you and any co-owners (like your spouse) must meet this requirement to qualify.

There is no maximum age limit—in fact, older borrowers typically qualify for larger loan amounts since the lender's risk is lower when the expected loan term is shorter.

"At 83, I was still able to qualify for a substantial reverse mortgage," notes Edward from Victoria. "This allowed me to help my grandson with his education when he needed it most."

What Happens If You Live Too Long on a Reverse Mortgage?

This question reflects a common concern: what if the interest accumulation eventually exceeds your home's value?

The good news is that Canadian reverse mortgage providers offer a "no negative equity guarantee," ensuring you'll never owe more than your home is worth, regardless of how long you live or what happens to housing prices.

This means:

• You can remain in your home for life, regardless of how the balance grows
• If the loan eventually exceeds your home's value, the lender absorbs the difference
• Your estate won't face a shortfall if housing prices drop dramatically

"I worried about living into my hundreds and using up all my equity," admits Grace, 77, from Burlington. "Knowing there was a guarantee that I wouldn't owe more than my home's value gave me the confidence to proceed."

What Is the Current Interest Rate on a Reverse Mortgage?

As of October 2024, interest rates on Canadian reverse mortgages typically range from 6.99% to 8.99% for fixed-rate options. Variable rate options are also available, usually tied to the prime rate plus a premium.

These rates are generally 1-2% higher than conventional mortgages, reflecting the increased risk to lenders. The exact rate you'll receive depends on:

• Current market conditions
• The term you select (6-month, 1-year, 3-year, or 5-year)
• Whether you choose a fixed or variable rate
• The amount you borrow relative to your home's value
• Your credit profile and property details

It's worth noting that while these rates are higher than traditional mortgages, the lack of required payments until the loan becomes due offsets this disadvantage for many borrowers.

How Is a Reverse Mortgage Paid Back?

Repayment of a reverse mortgage typically occurs under the following circumstances:

1. When you sell your home: The outstanding loan balance is repaid from the sale proceeds
2. When you move out: If you leave your home for more than 12 months (e.g., moving to long-term care)
3. Upon your death: Your estate settles the loan as part of managing your assets

Early repayment is also possible, though it may involve penalties depending on your specific terms. Many borrowers choose to repay a portion of the interest annually to maintain more equity in their home.

"We set up a small annual payment to cover some of the interest," explains Susan from Winnipeg. "This balanced helping our children now while still preserving some inheritance for later."

Do People Still Do Reverse Mortgages?

Absolutely. In fact, reverse mortgages have grown significantly in popularity in Canada over the past decade. According to recent data, the reverse mortgage market has been growing at approximately 10-15% annually for several years.

This growth reflects several factors:

• Canada's aging population
• Substantial home equity accumulated by many seniors
• Rising costs facing younger generations
• Desire to "age in place" rather than downsizing
• Increased awareness and understanding of reverse mortgage products

With over $5.4 billion in reverse mortgage debt outstanding in Canada, this financial tool has become a mainstream option for many seniors, particularly those looking to support family members financially.

What Really Happens with a Reverse Mortgage?

Beyond the financial mechanisms, what's the practical reality of living with a reverse mortgage? Most borrowers report that daily life continues unchanged—you remain the homeowner, continue to pay property taxes and insurance, and maintain your property as usual.

The main difference is that your equity gradually decreases as interest accrues on the borrowed amount. This reduction in equity means less will be available to your estate when the home is eventually sold.

For many borrowers, the peace of mind and ability to help family members while maintaining their own living situation outweighs this drawback.

"If I hadn't taken a reverse mortgage, I wouldn't have been able to help my daughter through her divorce and career change," reflects James from Toronto. "Seeing her back on her feet now is worth far more to me than preserving that equity."

Which Banks in Canada Do Reverse Mortgages?

In Canada, reverse mortgages are offered by a limited number of financial institutions:

1. HomeEquity Bank: Offers the CHIP Reverse Mortgage, the longest-established and most widely recognized reverse mortgage product in Canada
2. Equitable Bank: Provides the Flex Reverse Mortgage product, a newer competitor in the market
3. Bloom Financial: A recent entrant offering reverse mortgage products with some innovative features

Unlike in some countries, major Canadian chartered banks (RBC, TD, CIBC, BMO, Scotiabank) do not currently offer reverse mortgage products directly, though they may refer clients to these specialized providers.

How Long Is a Typical Reverse Mortgage?

Unlike conventional mortgages with fixed terms, reverse mortgages have no predetermined end date. They remain in place for as long as you live in your home, which could be a few years or several decades.

The average duration of a reverse mortgage in Canada is approximately 7-10 years, though this varies widely. Some borrowers maintain their reverse mortgages for 20+ years, while others may sell and repay much sooner.

Factors affecting duration include:

• Your age when you take out the reverse mortgage
• Your health and ability to remain in your home
• Your decision to move for family or lifestyle reasons
• Housing market conditions that might prompt selling

What Are the Cons with a Reverse Mortgage?

While we've touched on some disadvantages, here's a comprehensive look at the potential drawbacks to consider:

1. Higher interest rates: Typically 1-2% higher than conventional mortgages
2. Compounding interest: Interest accrues on both the principal and the accumulated interest
3. Reduced inheritance: Less equity remains for your heirs
4. Setup costs: Legal fees, appraisal fees, and administrative costs can be substantial
5. Early repayment penalties: Significant charges may apply if you repay early
6. Limited lender options: Only a few providers offer these products in Canada
7. Potential impact on benefits: May affect eligibility for some income-tested government benefits

"We made a detailed pro and con list before proceeding," says Margaret from Edmonton. "For us, the ability to help our son with his medical school costs far outweighed the downsides, but every family's situation is different."

Does Having a Reverse Mortgage Hurt Your Credit?

Generally, a reverse mortgage does not negatively impact your credit score. In fact, since there are no required monthly payments to potentially miss, a reverse mortgage might indirectly help your credit by reducing other debts or preventing financial strain.

However, failing to maintain property tax payments, home insurance, or proper home maintenance could eventually lead to default issues that might affect your credit.

It's worth noting that the reverse mortgage itself will appear on your credit report as a line of credit, which may be considered if you apply for other credit products.

Why Would Someone Use a Reverse Mortgage?

While this article focuses on using reverse mortgages to support family members, there are many motivations for considering this financial tool:

1. Supporting family: Helping children or grandchildren with major expenses
2. Supplementing retirement income: Creating regular cash flow for daily living expenses
3. Home improvements: Funding renovations or adaptations to age in place
4. Healthcare costs: Covering medical expenses not covered by provincial health plans
5. Debt consolidation: Paying off higher-interest debts
6. Travel or lifestyle enhancement: Funding retirement dreams or experiences
7. Emergency fund: Creating a financial buffer for unexpected expenses
8. Tax efficiency: Accessing tax-free funds rather than selling investments that might trigger capital gains

"Initially, we took a reverse mortgage just to help our daughter," shares Thomas from Richmond. "But having that extra financial cushion also allowed us to take the European trip we'd always dreamed of without worrying about finances."

Conclusion: Making the Right Decision for Your Family

Using a reverse mortgage to support adult children or grandchildren can be a powerful tool for family financial planning, but it requires careful consideration of both short and long-term implications.

When weighing this option, consider having a family discussion to ensure everyone understands the impacts on inheritance expectations. Many families find that providing support when it's most needed—during early adulthood or family formation years—creates more value than preserving maximum home equity for inheritance decades later.

Before proceeding, consult with an independent financial advisor who can review your specific situation and help determine if a reverse mortgage aligns with your overall financial goals and family support objectives.

Remember that what works for one family may not be appropriate for another. The right decision balances your needs for security and comfort with your desire to support your loved ones through life's financial challenges.

Have you considered how your home equity might help support your family's next generation? A reverse mortgage might be worth exploring as part of your family's comprehensive financial strategy.