Reverse Mortgage in Canada: How CHIP Works and When It Makes Sense#

For many Canadian retirees, their home is their largest asset — often representing 50–70% of their net worth. But unlike a stock portfolio or RRIF, a home doesn't generate automatic cash flow. To access the equity, you traditionally had to sell or borrow.

A reverse mortgage is a third option: access your home equity as tax-free cash, with no monthly payments required, and keep living in your home. The Canadian market is dominated by HomeEquity Bank's CHIP (Canadian Home Income Plan) product. This guide explains how it works, what it really costs, and whether it belongs in your retirement plan.

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What Is a Reverse Mortgage?#

A reverse mortgage is a loan against the equity in your home. Unlike a traditional mortgage:

• No monthly payments required — neither principal nor interest (until you sell or vacate)
• You retain ownership — you live in and own your home throughout the loan period
• The loan is repaid when you sell, move out, or die — from the proceeds of the home sale

Interest accrues on the loan balance over time, compounding (typically at higher rates than traditional mortgages). The longer you hold the reverse mortgage, the larger the outstanding balance — and the more equity is consumed.

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How CHIP (HomeEquity Bank) Works#

HomeEquity Bank is the dominant (and until recently, only) reverse mortgage lender in Canada. Their CHIP product has specific eligibility and terms:

Eligibility#

• Age: Must be 55+ (all homeowners on title must be 55+)
• Property: Owner-occupied residential property (home, condo, some rural properties)
• Equity: Must have substantial equity in the home

Maximum Loan Amount#

You can borrow up to 55% of your home's current appraised value. In practice, the percentage depends on your age, property type, and location:

For a $900,000 home, a 65-year-old might access $315,000–$360,000 maximum under CHIP.

How You Receive Funds#

You can choose to receive the funds:

• Lump sum: all at once
• Scheduled advances: monthly, quarterly, or annual payments over a set period
• A combination: lump sum for immediate needs, with a remaining credit available for future advances

Interest Rates#

CHIP interest rates are typically 1–3% higher than conventional mortgage rates. In 2026, reverse mortgage rates might be 7–9%/year depending on the term and type. Interest is compounded — it adds to the loan balance every month, which means the outstanding balance grows exponentially over time.

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The Cost of a Reverse Mortgage: A Detailed Look#

The fundamental cost of a reverse mortgage is interest that compounds without payment, eating into your estate. Here's how the numbers work:

Example: $200,000 Reverse Mortgage at 8%#

If the home is worth $1,000,000 and you took $200,000 at age 65, by age 85 the balance has grown to ~$933,000 — consuming nearly the entire home value. The estate would have very little remaining after selling the home and repaying the loan.

The HomeEquity Bank "No Negative Equity" Guarantee#

CHIP guarantees that you will never owe more than the fair market value of your home at the time of repayment. If the home has appreciated enough to cover the loan + interest, your estate recovers the surplus. If the loan balance exceeds home value, the bank absorbs the loss.

This protection is valuable — but its probability of being needed increases substantially if:

• You hold the reverse mortgage for many years
• Home prices decline or stagnate
• You take large advances early

Additional Costs#

• Setup fees: $795–$1,995 (legal, appraisal)
• Prepayment penalties: if you repay early, penalties apply (especially in the first few years)
• Ongoing fees: some products have annual administration fees

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When Does a Reverse Mortgage Make Sense?#

Good Use Cases#

1. Income shortfall with high home equity You have substantial home equity but limited liquid assets. Your CPP, OAS, and small RRIF aren't covering expenses, but you have a $800,000 paid-off home. A reverse mortgage provides cash flow without forcing a sale.

2. Home modifications for aging in place Accessibility modifications (wheelchair ramp, bathroom grab bars, elevator, stair lift) can be expensive ($20,000–$100,000+). A reverse mortgage lump sum can fund these improvements and allow you to stay in your home longer — often preferable to and less expensive than moving to a retirement residence.

3. Helping adult children (no monthly cash flow drain) Providing a down payment to a child via a reverse mortgage advance doesn't require monthly payments from your income. The cost is deferred equity reduction, not current cash flow.

4. Medical or emergency costs Unexpected large medical expenses or emergency home repairs funded through a reverse mortgage, when no other liquid assets are available.

5. Delaying RRSP/RRIF drawdown Using reverse mortgage proceeds to fund expenses while deferring RRIF withdrawals or CPP — if the after-tax benefit of deferral (avoiding OAS clawback, getting higher indexed CPP) exceeds the reverse mortgage interest cost.

Poor Use Cases#

1. Funding ongoing lifestyle expenses for many years Using a reverse mortgage as the primary income supplement for 15–20 years is expensive. The compounding interest can consume most of the home's equity, leaving little for the estate or future care costs.

2. When alternatives are available and preferable If you can access a HELOC (home equity line of credit), downsize, or draw from investments, the lower cost of those options typically beats the reverse mortgage.

3. When you plan to move within 5 years Prepayment penalties make short-term reverse mortgages very expensive.

4. When the home is destined for children If preserving home equity for heirs is a priority, a reverse mortgage directly undermines that goal. Life insurance or other strategies to fund the intended inheritance would be preferable.

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Alternatives to a Reverse Mortgage#

Before choosing a reverse mortgage, consider:

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Government Benefits Impact#

CHIP proceeds are not counted as income for:

• GIS eligibility: reverse mortgage advances don't count as income on the GIS calculation
• OAS clawback: proceeds are not income for OAS purposes
• Income tax: reverse mortgage proceeds are not taxable income

This is a key advantage of a reverse mortgage over RRSP/RRIF withdrawals, which count as income for all these purposes.

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The Right Questions to Ask#

Before signing:

1. What is the total interest rate and how is interest compounded?
2. What are the prepayment penalties if I sell or repay early?
3. What happens if I want to add my spouse to the title later?
4. What is the maximum amount I'm eligible for, and how was it calculated?
5. Does the product have a no-negative-equity guarantee?
6. What are the fees for setup, appraisal, and legal costs?
7. What happens to the loan if I need to move to a care facility?