A reverse mortgage has no monthly payments. That is one of its defining features — and one of its most appealing qualities for retirees on fixed incomes.

But "no monthly payments" does not mean "no cost." Interest accumulates on your loan balance every month, and because you are not paying it down, it compounds over time. Understanding exactly how this works — and what it means for your equity and your estate — is essential before you sign anything.

This article explains it clearly, with real numbers.

On a conventional mortgage, you make monthly payments that cover both interest and principal. Over time, your balance decreases.

On a reverse mortgage, you make no payments. Each month, the interest that would have been due is instead added to your loan balance. Next month, you pay interest on the original principal plus the interest that was added last month. This is compound interest — interest on interest.

Here is a simple example:

• Loan amount: $200,000
• Interest rate: 7% per year (approximately 0.583% per month)
• Month 1: Interest = $1,167. New balance = $201,167
• Month 2: Interest = $1,174 (on $201,167). New balance = $202,341
• Month 3: Interest = $1,180. New balance = $203,521

The balance grows a little faster each month because the base it is calculated on keeps growing.

Using a 7% annual rate on a $200,000 initial loan:

At 7%, the balance roughly doubles every 10 years. This is the mathematical reality of compound interest, and it is why understanding the long-term trajectory matters.

What matters for your estate — and for your own planning — is not the loan balance in isolation, but the remaining equity: the difference between your home's value and the loan balance.

Here is an example with home appreciation factored in:

Assumptions:

• Home value at start: $800,000
• Loan amount: $200,000 (25% of home value)
• Reverse mortgage rate: 7%
• Home appreciation: 3% per year (conservative for most Canadian markets)

In this scenario, the remaining equity actually increases over the first 15 years, even as the loan balance grows — because the home is appreciating faster than the interest is accumulating. After 20 years, the equity is still $670,960 — more than three times the original loan amount.

This is not guaranteed — home values can decline, and rates can be higher — but it illustrates why the "reverse mortgages eat all your equity" concern is often overstated for borrowers who take a modest loan relative to their home's value.

Fixed rate: Your interest rate is locked for the term (typically 1–5 years). Your balance grows at a predictable, calculable pace. At renewal, you negotiate a new rate for the next term.

Variable rate: Your rate fluctuates with the lender's prime rate. When rates fall, your balance grows more slowly. When rates rise, it grows faster.

The choice between fixed and variable affects how predictable your loan balance trajectory is. Most Canadian reverse mortgage borrowers choose fixed rates for the certainty — particularly when planning for estate outcomes.

Reverse mortgage rates are set by each lender independently, based on their cost of funds and competitive positioning. They are not directly tied to the Bank of Canada overnight rate the way variable mortgage rates are, though they are influenced by broader interest rate conditions.

At the end of each term, your rate is renewed at the current rate offered by your lender. You can typically switch lenders at renewal (subject to any prepayment penalties), which gives you some ability to shop for better rates over time.

If you repay your reverse mortgage before the end of the term — because you sell, move, or simply want to pay it off — most lenders charge a prepayment penalty.

The penalty structure varies by lender and term, but common approaches include:

• Interest rate differential (IRD): The difference between your contracted rate and the current rate for the remaining term, applied to your outstanding balance
• Flat percentage: A fixed percentage of the outstanding balance (e.g., 3 months' interest)
• Declining penalty: A percentage that decreases over the term (e.g., 5% in year 1, 4% in year 2, etc.)

Prepayment penalties can be significant — potentially $5,000–$20,000 or more depending on the balance and how early you exit. Understanding the penalty structure before you sign is essential, particularly if there is any chance you might sell or move within the term.

You are not required to let interest compound indefinitely. Several strategies can reduce the long-term cost:

Make voluntary payments Most Canadian reverse mortgage lenders allow you to make voluntary payments at any time without penalty (up to a certain annual limit). Even small regular payments — $200–$500 per month — can meaningfully slow the balance growth.

Take only what you need The less you borrow, the less interest accumulates. If you need $100,000 for a specific purpose, borrowing $100,000 rather than $200,000 cuts your interest accumulation in half.

Use scheduled advances instead of a lump sum If you need ongoing income supplementation rather than a one-time lump sum, receiving funds in monthly or quarterly advances means you are only paying interest on the funds you have actually received — not on the full approved amount.

Refinance at renewal if rates improve At each renewal, you have the opportunity to shop for a better rate. An independent broker can help you compare options at renewal and potentially reduce your rate going forward.

The interest cost of a reverse mortgage is real and meaningful. Over 10–15 years, a $200,000 loan at 7% will grow to $393,000–$552,000. That is a significant amount of accumulated interest.

But the relevant comparison is not "reverse mortgage interest vs. zero cost." The relevant comparison is:

• vs. selling: Transaction costs of $40,000–$80,000+ upfront, plus the cost of moving, plus the loss of your home
• vs. HELOC: Monthly interest payments of $1,000–$1,500+ that must come from somewhere
• vs. drawing down investments: Selling assets in a down market, triggering capital gains, reducing the portfolio that generates your income
• vs. not accessing the equity at all: Living with financial stress, deferring necessary care, or reducing quality of life to preserve an asset

For many retirees, the accumulated interest cost of a reverse mortgage is the most affordable way to access their equity — when compared honestly against the alternatives.

Reverse mortgage interest compounds over time, and the balance grows meaningfully over a 10–20 year period. This is the central cost of the product, and it should be understood clearly before you sign.

But the cost needs to be evaluated in context: against your home's likely appreciation, against the alternatives available to you, and against the value of what the funds provide — whether that is staying in your home, covering care costs, or simply living retirement without financial stress.

Want to see exactly what a reverse mortgage would cost in your specific situation? Request a free conversation — we will run the numbers for your home value, your age, and your borrowing needs, and show you the full picture.