How Reverse Mortgage Interest Really Works: Rates, Compounding, and What You'll Pay

"How much interest will I actually pay on a reverse mortgage?" This is the question that makes people most anxious—and most confused. The answer isn't straightforward because reverse mortgage interest works differently than a traditional mortgage.

Here's the honest truth: If you understand compounding, the numbers are manageable. If you don't, they seem terrifying. Let's change that.

The Fundamental Difference: Reverse Mortgage Interest

Traditional mortgage: You make monthly payments. Interest is charged on the balance, but the balance goes down each month because of your payments.

Reverse mortgage: You don't make monthly payments. Interest is charged on the balance, AND the balance grows every month because interest is being added to it.

This is called compound interest, and it's the key to understanding reverse mortgage costs.

The Math of Compounding: Real Numbers

Let's say you borrow $200,000 at 7% annual interest. Here's what happens:

Year	Beginning Balance	Annual Interest (7%)	Ending Balance
1	$200,000	$14,000	$214,000
2	$214,000	$14,980	$228,980
3	$228,980	$16,029	$244,009
4	$244,009	$17,081	$261,090
5	$261,090	$18,276	$279,366
10	Balance at year 10	Annual interest	$393,431
15	Balance at year 15	Annual interest	$551,913
20	Balance at year 20	Annual interest	$773,536

Notice: After 10 years, you've borrowed $200,000 but owe $393,431. After 20 years, you owe nearly $774,000.

This is why the number seems scary. The debt more than doubles over 20 years.

But here's the context: Your home probably appreciates over the same 20 years.

Home Appreciation Offsets Interest Growth

If your home appreciates 3% annually (historical average in Ontario):

Timeframe	Home Value Growth	RM Debt Growth	Net Equity
Starting point	$650,000 home	$200,000 RM debt	$450,000 net
After 10 years	$874,000	$393,431	$480,569
After 15 years	$1,007,933	$551,913	$456,020
After 20 years	$1,162,055	$773,536	$388,519

The key insight: Even with compound interest, your net equity often stays stable or grows if your home appreciates.

• Year 10: Net equity up from $450,000 to $480,569 ✓
• Year 15: Net equity down slightly to $456,020 (mostly flat) ✓
• Year 20: Net equity down to $388,519, but still substantial ✓

This is very different from "borrowing $200,000 and owing $774,000 with nothing to show for it."

According to research from the Canadian Mortgage and Housing Corporation, Ontario homes appreciate an average of 3-3.5% annually over 20-year periods. This appreciation directly offsets reverse mortgage interest growth, making the net cost much lower than the headline debt number suggests.

Current Reverse Mortgage Rates in Ontario (2026)

As of April 2026, reverse mortgage rates in Ontario are approximately:

Lender	Fixed Rate	Variable Rate
CHIP Mortgages	6.99%-7.49%	7.25%-7.75%
Equitable Bank	6.95%-7.45%	7.20%-7.70%
Bloom Financial	7.09%-7.59%	7.35%-7.85%
Home Trust	7.15%-7.65%	7.40%-7.90%

What affects your rate:

• Your age — Older borrowers get slightly better rates
• Home location — Urban properties generally qualify for better rates than rural
• Home value — Higher-value homes may qualify for better rates
• LTV (Loan-to-Value) — Lower LTV = better rates
• Fixed vs. Variable — Fixed rates are higher but predictable; variable rates are lower but change with prime

Fixed Rate vs. Variable Rate: Which Costs Less?

Fixed rate example: 7.5% fixed

• You pay 7.5% forever
• Interest compounds at a known rate
• Your total cost is predictable
• Over 20 years: $200,000 grows to ~$820,000

Variable rate example: 7.25% current, likely to change

• You pay 7.25% now
• If prime rises, your rate rises (or falls if prime drops)
• Your total cost is unpredictable
• If rates rise to 8.5%, costs increase significantly
• If rates fall to 6.5%, costs decrease

Which costs less? Nobody knows in advance. If rates fall, variable is better. If rates rise, fixed was better.

Which is safer? Fixed rate—you know exactly what you'll owe.

Which do most borrowers choose? It's split, but many prefer fixed for peace of mind.

The True Cost Over Different Timeframes

Let's be specific about total costs depending on how long you live:

Scenario: 73-year-old borrows $200,000 at 7% fixed rate

If You Live To	Years Held	Total Owed	Your Home Value (3% appreciation)	Net Position
75 (2 years)	2	$228,980	$689,135	$460,155 net
80 (7 years)	7	$326,268	$799,506	$473,238 net
85 (12 years)	12	$473,455	$927,081	$453,626 net
90 (17 years)	17	$669,195	$1,074,245	$405,050 net
95 (22 years)	22	$945,761	$1,242,891	$297,130 net

What this shows:

• Short-term (under 10 years): Your net equity is actually stable or growing
• Mid-term (10-15 years): Net equity slightly declining but still substantial
• Long-term (20+ years): Net equity declining more, but still significant inheritance

The cost of living long is not "the bank steals your house." It's gradual reduction in inheritance as interest compounds.

How Compounding Works: Monthly Breakdown

Interest compounds monthly, not annually. Here's how:

Month 1:

• Balance: $200,000
• Monthly interest rate: 7% ÷ 12 = 0.583%
• Interest charged: $200,000 × 0.583% = $1,166
• New balance: $201,166

Month 2:

• Balance: $201,166
• Monthly interest: $201,166 × 0.583% = $1,173
• New balance: $202,339

Notice: Month 2's interest is charged on the new balance ($201,166), not the original ($200,000). This is compounding.

Over 12 months with no draws, your $200,000 balance becomes ~$214,000 (approximately 7% growth).

If You Draw Additional Money Over Time

Most people don't borrow $200,000 all at once. They have a line of credit and draw over time. This changes the calculation:

Scenario: You draw $12,000/year from a RM line of credit

Year	Starting Balance	Interest Charged	Annual Draw	Ending Balance
1	$0	$0	$12,000	$12,840 (interest on $12,000)
2	$12,840	$899	$12,000	$26,593
3	$26,593	$1,861	$12,000	$41,352
5	Balance accumulates	Interest grows	$12,000/yr	$82,447
10	(continuing draws)	(continuing interest)	$12,000/yr	$196,558

Key insight: With annual draws of $12,000, after 10 years you've drawn $120,000 but owe $196,558. The difference ($76,558) is pure interest.

This is the reason many financial advisors say: "If you're going to use a reverse mortgage, use it for specific needs, not ongoing lifestyle costs."

The Cost of Access: Fees Beyond Interest

Interest is just one cost. There are also:

Fee Type	Amount	When Paid
Appraisal fee	$200-500	At closing
Legal/title insurance	$800-1,500	At closing
Closing/administration fees	$1,500-3,000	At closing
Annual maintenance fees	$0-300/year	Annually (some lenders only)
Interest	7% annually	Monthly (compounds)

Total upfront cost: $2,500-5,000 Annual cost (if drawn): Interest on balance + maybe $300 maintenance fee

The Comparison: RM Interest vs. Alternatives

If you needed $200,000 cash, what would the costs be?

Option	Upfront Cost	Annual Cost	10-Year Total Cost
Reverse Mortgage (7% fixed)	$4,000	Interest on balance (~$14,000 year 1, grows)	~$193,000 (total owed vs. originally borrowed)
Home Equity Line of Credit (7.5%)	$500	Interest + $150 annual fee	~$210,000 + $1,500 fees
Personal Loan (10% unsecured)	$500	Interest on declining balance	~$127,000
Credit Card (19.99%)	$0	Interest on balance	~$600,000+ (catastrophic)
Sell home and buy condo	~$40,000 in commissions/fees	Ongoing condo fees + property tax	~$75,000+ over 10 years

The reveal: A reverse mortgage interest cost is actually comparable to (or sometimes better than) alternatives, especially when you factor in that you keep your home and don't pay recurring fees.

Fixed vs. Variable Rate Decision Framework

Choose FIXED if: ✓ You value predictability above all else ✓ You think interest rates are going to rise ✓ You plan to hold the RM for 10+ years ✓ You want to know exactly what you'll owe ✓ Peace of mind is worth 0.25-0.5% higher rate

Choose VARIABLE if: ✓ You think interest rates will fall ✓ You plan to repay within 5-7 years ✓ You can handle the uncertainty ✓ You want the lowest rate today ✓ You're comfortable with risk

Current market opinion (April 2026): Most experts expect rates to stabilize or fall slowly over the next 2-3 years, which slightly favors variable. But nobody knows.

The Monthly Interest Calculation You'll See

On your reverse mortgage statement, you'll see:

Opening Balance:           $125,000
Interest Charged (7%/12):  $729
Draws This Month:          $0
Closing Balance:           $125,729

This line will show every month. Interest is charged even if you don't draw anything new.

How Interest Affects Your Heirs

Important estate planning fact:

When you pass, your estate must repay the reverse mortgage. Here's how it works:

Scenario	What Happens
Home worth $650,000; RM balance $350,000	Estate pays $350,000; heirs inherit $300,000
Home worth $650,000; RM balance $700,000	RM is "underwater"; estate pays full $650,000 (no negative equity); heirs inherit $0
Home appreciates to $850,000; RM balance $450,000	Estate pays $450,000; heirs inherit $400,000

This is why the "no negative equity guarantee" matters. Your estate will never owe more than the home is worth.

Strategies to Minimize Interest Costs

If you're concerned about interest, consider:

Strategy 1: Access only what you need

• Don't borrow $300,000 if you only need $150,000
• Interest compounds on actual balance, so smaller balance = lower costs

Strategy 2: Use a line of credit, not a lump sum

• LOC: Pay interest only on what you draw
• Lump sum: Pay interest on full amount immediately
• LOC costs less if you don't draw everything

Strategy 3: Repay when possible

• If you receive inheritance or bonus, repay part of the RM
• You'll save substantial interest
• Prepayment has no penalty

Strategy 4: Consider age and timing

• Get RM at age 75-80 (better rates than age 55-60)
• Fewer years for interest to compound
• You'll die with smaller balance owed

Strategy 5: Combine with other strategies

• Use CPP deferral to delay larger CPP payment
• Use RRIF withdrawals strategically
• Use RM as backup, not primary income

Quick Reference: Interest Scenarios

Borrowed	Rate	10 Years	15 Years	20 Years
$100,000	7%	$196,715	$276,863	$386,968
$200,000	7%	$393,431	$551,913	$773,536
$300,000	7%	$590,146	$827,870	$1,160,304
$200,000	6%	$359,121	$478,637	$638,162
$200,000	8%	$431,788	$639,863	$934,932

(Note: Assumes no additional draws after initial borrowing; actual amounts vary with monthly draws)

Frequently Asked Questions

Is 7% interest high for a reverse mortgage?

In historical context, no—it's comparable to traditional mortgages. In the current (2026) context, yes—it's above regular mortgage rates because reverse mortgages have higher risk. But it's normal for reverse mortgages.

Why does my reverse mortgage statement show more interest than I calculated?

Because interest compounds monthly, not annually. Plus, if you've made draws during the month, interest is charged on the new balance. Monthly compounding is why the numbers look higher than annual calculations.

Can I get a lower rate?

Sometimes, depending on lender competition, your age, home value, and market conditions. It's worth shopping around. Rates vary by lender.

What if interest rates fall after I lock in a fixed rate?

You're stuck with your rate—you can't refinance without substantial costs. This is the tradeoff of choosing fixed: peace of mind vs. missing out if rates fall.

If I'm older (85+), is interest less of a concern?

Yes, mathematically, the fewer years interest compounds. But you also need to consider: if you live longer than expected, the balance grows more. There's no "safe" age—just different tradeoffs.

Is there a reverse mortgage with no interest?

No. Interest is how lenders make money. Even government programs don't offer no-interest reverse mortgages.

The Bottom Line

Understanding reverse mortgage interest is essential before you borrow. The numbers look scary at first—$200,000 becoming $770,000 over 20 years—but in context of home appreciation, changing life circumstances, and alternatives, they're often manageable.

The key insights:

1. Compound interest is real, but home appreciation often offsets it
2. Your rate matters—even 0.5% difference adds up
3. How long you live determines total cost—can't predict this
4. How much you draw matters—draw less, pay less interest
5. Fixed vs. variable is a risk choice—not right/wrong, just different

Before you commit, use a reverse mortgage calculator to model your specific situation, then discuss with Rick Sekhon Reverse Mortgages to ensure you understand the costs and benefits.

Get your free Ontario Reverse Mortgage Guide →