Reverse Mortgage Burn Rate: Understanding How Your Balance Grows

You borrow $100,000 from a reverse mortgage. How much will you owe in 10 years? The answer depends on the "burn rate"—how fast compound interest grows your balance. Many Ontario seniors don't realize that a $100,000 reverse mortgage can become $170,000–$190,000 over 15 years. Let's break down the math so you understand exactly what you're getting into.

This article is for educational purposes only and does not constitute financial advice.

What Is "Burn Rate" and Why It Matters

The burn rate is the annual rate at which your reverse mortgage balance grows due to interest. Unlike a traditional mortgage (where you reduce the balance with monthly payments), a reverse mortgage's balance grows because interest compounds and you're not paying it down.

Key difference from traditional mortgages:

• Traditional mortgage: Balance shrinks ($500/month × 12 = $6,000/year paid down)
• Reverse mortgage: Balance grows (5% interest × balance = $5,000/year added)

The burn rate is critical because:

1. It determines how much you'll owe when you move/sell
2. It affects how much your heirs inherit
3. It influences whether your home's appreciation outpaces mortgage growth

The Math: How Compound Interest Works

Simple example:

• You borrow: $100,000
• Interest rate: 5.5%
• Monthly interest accrual: $100,000 × 5.5% ÷ 12 = $458/month

Compound effect (Year 1):

• Month 1: Balance = $100,458
• Month 2: Balance = $100,917 (interest compounds on $100,458)
• Month 12: Balance = $105,654 (interest compounds monthly)

By Year 10:

• Your balance has grown to approximately $170,000
• You've paid NO monthly payments
• Interest alone added $70,000

The critical insight: The longer you hold the reverse mortgage, the faster the balance grows (compound interest accelerates).

Real Ontario Examples: Burn Rate in Action

Example 1: Age 70, $150,000 Borrow, 5.5% Fixed Rate

Year	Starting Balance	Interest Added	Ending Balance	Total Paid Interest
1	$150,000	$8,250	$158,250	$8,250
5	$179,100	$9,850	$191,000	$45,250
10	$240,500	$13,230	$255,500	$110,000
15	$315,000	$17,330	$334,000	$194,000
20	$405,000	$22,275	$431,000	$306,000

Key insight: After 20 years, your $150,000 borrow has become $431,000. Interest costs $306,000 (more than double the original amount).

When does this become a problem?

• Home appreciates to $700,000 → You still have $269,000 equity (manageable)
• Home stays at $600,000 → You have $169,000 equity (less cushion)
• Home declines to $400,000 → No-negative-equity guarantee protects you (lender absorbs loss)

Example 2: Age 75, $75,000 Borrow, 5.5% Fixed Rate

Year	Balance	Total Interest Paid
5	$95,500	$20,500
10	$127,500	$52,500
15	$167,000	$92,000
20	$215,500	$140,500

Interpretation: Smaller borrow = slower absolute growth, but the burn rate percentage is the same (5.5%/year compounded monthly).

Example 3: Age 68, $200,000 Borrow, Variable Rate (prime + 0.5%)

Assumption: Prime rate fluctuates 4.5% → 6.5% over 15 years

Year	Rate	Balance Growth	Ending Balance
1	5.0%	$10,000	$210,000
3	5.5%	$11,550	$233,000
5	6.0%	$14,000	$268,000
10	6.5%	$18,200	$357,000
15	6.5%	$23,200	$469,000

Key risk: If rates spike, your burn rate increases (balance grows faster). This is why fixed-rate reverse mortgages are popular—they lock in your burn rate.

Fixed vs Variable: Which Burn Rate Is Better?

Fixed-Rate Reverse Mortgage

Current Ontario fixed rates: 5.5%–6.0%

Pros:

• ✓ Burn rate is locked in (predictable)
• ✓ No surprise rate increases
• ✓ Easy to plan long-term

Cons:

• ✗ Locked rate may be higher than current variable
• ✗ If variable rates drop, you're stuck at higher rate

Burn rate at 5.5% fixed:

• Year 10: $170,000 balance (starting $100k)
• Year 20: $286,000 balance

Variable-Rate Reverse Mortgage

Current Ontario variable rates: 4.5%–5.0%

Pros:

• ✓ Lower starting rate (typically 0.5–1% lower than fixed)
• ✓ If rates drop, burn rate decreases

Cons:

• ✗ If rates rise, burn rate accelerates
• ✗ Unpredictable; hard to plan

Burn rate at 4.5% variable (Year 1) vs 6.5% (if rates spike):

• Year 1: Balance grows $4,500 (4.5%)
• Year 10 (if rates spike): Balance grows at 6.5% (much faster)

Trade-off analysis:

• Conservative (low risk tolerance): Choose fixed
• Bet rates will drop: Choose variable (risky)
• Plan to repay within 5 years: Variable might save $5,000–$8,000 in interest

The Amortization Paradox: Why Your Balance Grows Faster Over Time

Counterintuitive fact: The burn rate (percentage) stays the same, but the dollar amount grows each year.

Why?

• Year 1 interest: 5.5% × $100,000 = $5,500
• Year 10 interest: 5.5% × $170,000 = $9,350
• Year 20 interest: 5.5% × $286,000 = $15,730

Same 5.5%, but dollar impact nearly triples.

This is why the earlier you repay, the less interest you pay:

• Repay after 5 years: ~$30,000 interest total
• Repay after 10 years: ~$70,000 interest total
• Repay after 20 years: ~$200,000 interest total

Key strategy: If you might sell or refinance within 10 years, reverse mortgage interest is manageable.

How Home Appreciation Offsets Burn Rate

The critical balance:

Your reverse mortgage balance grows at the burn rate, BUT your home typically appreciates too.

Scenario: $400,000 Home, $100,000 Reverse Mortgage

Year	Home Value	RM Balance	Your Equity	Equity %
0	$400,000	$100,000	$300,000	75%
5	$450,000	$132,000	$318,000	71%
10	$512,000	$170,000	$342,000	67%
15	$580,000	$222,000	$358,000	62%
20	$660,000	$286,000	$374,000	57%

Good news: Even though RM balance grew $186,000, your home appreciated $260,000. Your net equity grew $74,000.

But what if home appreciation is flat (or negative)?

Year	Home Value	RM Balance	Your Equity
0	$400,000	$100,000	$300,000
10	$400,000	$170,000	$230,000
20	$400,000	$286,000	$114,000

In a stagnant market: Burn rate becomes a real concern. Your equity shrinks.

This is why: Reverse mortgages work best when (1) you plan to stay <10 years, (2) your home appreciates normally, or (3) you're comfortable with moderate equity erosion.

Strategies to Minimize Burn Rate Impact

Strategy 1: Borrow Only What You Need

Smaller borrow = slower absolute growth

Scenario	5-Year Balance	10-Year Balance	Interest Cost
Borrow $50,000 @ 5.5%	$63,000	$85,000	$35,000
Borrow $100,000 @ 5.5%	$126,000	$170,000	$70,000
Borrow $150,000 @ 5.5%	$189,000	$255,000	$105,000

Insight: Doubling your borrow doubles your interest cost. Borrow strategically.

Strategy 2: Use Line of Credit (Draw Only What You Need)

Instead of: Lump sum ($150,000) earning interest immediately Consider: Line of credit, draw $50,000 now, $50,000 in 5 years

Result:

• First $50,000 burns for 10 years
• Second $50,000 burns for 5 years
• Total interest: ~$60,000 (vs. ~$110,000 if all borrowed upfront)

Savings: ~$50,000 in interest by deferring draws.

Strategy 3: Make Voluntary Prepayments

If you have cash available: Pay down your reverse mortgage balance.

• Original balance: $100,000
• Voluntary payment after 5 years: $20,000
• New balance: $112,000 (not $132,000)
• Interest savings: ~$20,000 over next 5 years

Strategy: Use dividend income, inheritance, or property sale proceeds to reduce balance.

Strategy 4: Choose Fixed Rate If Rates Are Low

If current fixed rate is attractive (5.5%): Lock it in.

• Predictable burn rate
• Protection if rates rise
• Peace of mind

Strategy 5: Plan Shorter-Term Reverse Mortgage

If you'll sell/downsize within 10 years:

• Interest cost is manageable (~$70,000 on $100,000)
• Burn rate impact is limited
• Equity erosion is modest

If you might stay 25+ years:

• Interest compounds significantly ($150,000+)
• Higher burn rate risk
• Consider alternatives (HELOC, downsizing)

FAQs: Burn Rate and Interest Growth

Does the burn rate change if I don't withdraw the full amount?

No. Your burn rate (interest percentage) is locked. It applies only to the amount you've actually borrowed.

Example:

• Approved for: $150,000
• You draw: $75,000 initially
• Burn rate applies to: $75,000 (not the full $150,000)
• Later, you draw $25,000 more
• Burn rate now applies to: $100,000 total

Can I stop the burn rate from accelerating?

Only by repaying the mortgage. Paying down your balance reduces the balance that interest compounds on.

Example:

• Original balance: $100,000 @ 5.5%
• After 5 years + annual prepayment of $5,000: ~$110,000 (instead of $132,000)
• Benefit: Slower burn rate by reducing the principal balance

What if I die—does my heirs owe the full burned amount?

Yes. Your estate (heirs) owes the balance that accumulated, including all accrued interest.

Example:

• You borrowed: $100,000
• 15 years later, you pass away
• Balance due: ~$222,000 (including interest)
• Heirs use home sale to repay

The no-negative-equity guarantee: If home is worth only $220,000 and RM balance is $222,000, heirs owe nothing (lender absorbs loss).

Is 5.5% burn rate actually high?

For a reverse mortgage: It's standard/typical. For retirement planning: It's significant—balance doubles every 13 years at 5.5% compound interest.

Comparison:

• GIC rates: 4.5%–5.0% (safe, liquid)
• Reverse mortgage: 5.5%–6.0% (less accessible, greater risk)

The Bottom Line

Your reverse mortgage "burn rate"—the speed at which balance grows—is typically 5.5%–6.0% annually on fixed-rate mortgages.

What this means:

• $100,000 becomes ~$170,000 in 10 years
• $150,000 becomes ~$255,000 in 10 years
• Interest compounds monthly; balance grows faster over time

Strategy:

• Borrow only what you need
• Prioritize shorter timelines (<15 years)
• Ensure home appreciates to offset burn rate
• Consider fixed rate for predictability
• Make voluntary prepayments if possible

Reality: For most Ontario seniors staying in their homes 10–15 years, the burn rate is manageable. It becomes concerning only if you stay 25+ years without home appreciation.

Speak to a licensed mortgage professional. Independent legal advice is required before closing a reverse mortgage in Ontario.

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Burn Rate Quick Reference

Borrow	Year 5 Balance	Year 10 Balance	Year 15 Balance
$50,000 @ 5.5%	$63,000	$85,000	$111,000
$100,000 @ 5.5%	$127,000	$170,000	$222,000
$150,000 @ 5.5%	$190,000	$255,000	$333,000

This content is for illustrative purposes only. Rates and terms may vary. Call Rick Sekhon for the best rates and more information.