How to calculate a reverse mortgage (a crash course)

How much cash could your home quietly be holding — for you, not the bank?

If you’re 55+ in Canada, a reverse mortgage can turn built-up equity into tax-free money without selling, downsizing, or making monthly payments. Tempting… but the math, fees, and long-term trade-offs aren’t always obvious—and getting them wrong can shrink what you leave to loved ones.

This crash course shows you exactly how the numbers work, and when an alternative makes more sense.

In this guide, you’ll learn:

• What a reverse mortgage is (in plain English)
• How lenders calculate your max amount
• Smarter alternatives (and when to use them)
• Pros & cons at a glance

Did you know? If you want to unlock cash without the compounding costs of a reverse mortgage, a secured home loan can actually give you access to more of your home equity with lower rates and a clearer payoff schedule. With Lotly, even non-traditional income sources like benefits or self-employment can count toward approval — book a free consultation to see if it’s the right fit for you today.

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What is a reverse mortgage?

A reverse mortgage is a financial product designed for homeowners aged 55 and older that allows them to access the equity in their home without having to sell it or make regular mortgage payments. Unlike traditional mortgages, where you make payments to the lender, with a reverse mortgage, the lender pays you. The loan amount, plus accumulated interest, is typically repaid when you sell your home, move out, or pass away.

Understanding how reverse mortgages work is essential before calculating potential amounts. These specialized financial products serve specific needs but come with important considerations regarding long-term costs and home equity preservation.

• Designed specifically for homeowners aged 55+
• Allows access to up to 55-59% of home equity (dependent on lender)
• No monthly payments required while living in the home
• Loan is repaid when you sell, move out, or pass away
• Available through limited lenders in Canada (primarily CHIP and Equitable Bank)

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How reverse mortgage calculations work

Reverse mortgage calculations involve several factors that determine how much you can borrow against your home's equity. Unlike traditional mortgages that focus on your ability to make monthly payments, reverse mortgages primarily consider your age, home value, and location.

The calculation process isn't simply a fixed percentage of your home's value. Instead, lenders use proprietary formulas that consider multiple variables to determine your maximum eligible amount.

Key factors that determine your reverse mortgage amount

• Age of homeowner(s): The older you are, the more you can typically borrow
• Home value: Higher-valued homes generally qualify for larger loan amounts
• Home type and condition: Single-family homes often qualify for higher amounts than condos
• Location: Some areas may have different lending limits or property value considerations
• Current interest rates: Higher rates reduce the amount you can borrow

Step-by-step calculation process

1. Determine your home's current market value through a professional appraisal
2. Calculate your available home equity using the formula: Home Equity = Current Home Value – Outstanding Mortgage Balance
3. Apply the lender's age-based factor (higher percentage for older borrowers)
4. Consider the maximum lending limit (typically up to 55-59% of home value in Canada)
5. Account for fees and closing costs that may be deducted from your available amount

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Reverse mortgage calculation example

Let's walk through a practical example to illustrate how reverse mortgage calculations work in real-world scenarios. This will help you understand the potential amount you might qualify for based on typical Canadian lending parameters.

Sample calculation for a 65-year-old homeowner

• Home value: $800,000
• Outstanding mortgage: $100,000
• Available equity: $700,000

Lenders use age-based and property factors to set a maximum loan-to-value. For illustration, assume a 40% factor at age 65:

• Maximum advance: $800,000 × 40% = $320,000
• Less existing mortgage payoff: $320,000 – $100,000 = $220,000
• Less estimated setup/closing costs (~$3,000): ≈ $217,000 net proceeds

So while this homeowner technically has $700,000 in equity, the reverse mortgage would unlock about $217,000 in cash under these assumptions. Note: the “40%” figure is an example only — actual percentages vary by lender, property type, and location.

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Understanding reverse mortgage interest calculations

Unlike traditional mortgages, reverse mortgage interest calculations can be complex because the interest compounds over time without any regular payments being made. This compounding effect significantly impacts the total amount owed when the loan eventually comes due.

Fixed-rate reverse mortgage interest calculation

In Canada, fixed mortgage rates are expressed as a nominal annual rate compounded semi-annually. That means interest is added twice a year, not calculated daily.

• Example: a fixed rate of 4.89%
• Semi-annual rate = 4.89% ÷ 2 = 2.445%
• On a $100,000 reverse mortgage, the first 6-month interest charge is: $100,000 × 0.02445 = $2,445
• The new balance after 6 months becomes $102,445.
• The next 6-month interest charge is calculated on this higher balance, so the loan compounds every half-year.

Variable-rate reverse mortgage interest calculation

Variable reverse mortgages in Canada are usually expressed as Prime + a spread, and they compound monthly.

• Example: Prime = 6.7%, spread = +3%, so total rate = 9.7%
• Monthly rate = 9.7% ÷ 12 ≈ 0.808%
• On a $100,000 balance, the first month’s interest is: $100,000 × 0.008083 ≈ $808
• That interest is added to the balance, so the next month’s interest is calculated on the new, larger total.
• If the Prime rate changes, the calculation adjusts to the new effective rate.

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Alternatives to reverse mortgages

While reverse mortgages can be beneficial for some seniors, they're not the only option for accessing home equity. Understanding alternatives can help you make a more informed decision based on your specific financial needs and goals.

If you've been turned down by traditional lenders due to income verification challenges or credit concerns, Lotly's secured home loan options provide a flexible alternative to reverse mortgages. Unlike reverse mortgages that are limited to seniors 55+, Lotly's secured home loans are available to Ontario homeowners of various ages who have built equity in their property.

Home Equity Line of Credit (HELOC)

• Allows borrowing up to 65% of home value
• Lower interest rates than reverse mortgages
• Requires regular minimum payments (usually interest-only)
• More flexible access to funds as needed
• Requires income qualification and good credit

Secured home loans

• Available for homeowners with sufficient equity
• Can borrow up to 80% of home value minus outstanding mortgage
• Fixed payment schedule with clear end date
• Generally lower interest rates than reverse mortgages
• Flexible qualification criteria with Lotly, accepting diverse income types including self-employment, benefits, and side gigs

Downsizing or selling

• Sell current home and purchase a less expensive one
• Access 100% of equity minus selling and moving costs
• Eliminates mortgage payments completely
• Provides fresh start in a potentially more manageable home
• May have emotional and practical challenges

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Pros and cons of reverse mortgages vs. alternatives

Understanding the advantages and limitations of each option is crucial for making an informed decision about accessing your home equity. Let's compare reverse mortgages with other alternatives to help you determine which solution best fits your needs.

Reverse mortgage considerations

Pros:

• No regular payments required
• Stay in your home
• Not dependent on income or credit score
• Tax-free cash
• No repayment until you move or pass away

Cons:

• Higher interest rates (typically 1.5-2% above traditional mortgages)
• Significant setup fees
• Reduces estate value for heirs
• Limited to 55-59% of home value
• Only available to those 55+

Secured home loan considerations

Pros:

• Lower interest rates than reverse mortgages
• Higher borrowing limits (up to 80% LTV)
• Available to homeowners of various ages
• Clear repayment schedule
• Flexible qualification with lenders like Lotly that consider all income types

Cons:

• Requires regular monthly payments
• Income verification is typically required (though Lotly offers more flexible options)
• May impact cash flow with monthly payments
• Potential for default if payments aren't maintained

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Making the right choice for your financial situation

Choosing between a reverse mortgage and alternatives requires careful consideration of your financial goals, current situation, and long-term plans. The right option depends on your unique circumstances and priorities.

When a reverse mortgage might be right for you

• You're 55+ and want to stay in your current home indefinitely
• You have a limited income and can't qualify for traditional financing
• You don't have heirs or aren't concerned about leaving home equity
• You need access to funds without making monthly payments
• You can afford the ongoing property taxes, insurance, and maintenance

When to consider alternatives

• You're under 55 or want more flexible options
• You can manage some level of monthly payments
• You want to preserve more equity for your estate
• You qualify for lower-interest options
• You may sell your home in the near future

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Ready to explore your home equity options? Lotly can help

Accessing your home's equity doesn't have to be complicated or restrictive. Whether you're considering a reverse mortgage or looking for more flexible alternatives, understanding all your options is the first step toward making a sound financial decision.

Lotly's secured home loans offer Ontario homeowners a practical alternative to reverse mortgages, with benefits including lower interest rates, flexible qualification criteria, and approval regardless of your credit score or income type.

Key takeaways to remember:

• Calculate carefully before committing to a reverse mortgage by considering all factors, including age, home value, and long-term interest accumulation that can significantly reduce your remaining equity.
• Explore alternatives like Lotly's secured home loans that offer more flexibility, potentially lower rates, and are available to homeowners of all ages with sufficient equity.
• Consider your long-term financial goals when choosing between reverse mortgages and alternatives—whether you prioritize no monthly payments or preserving more equity for your estate.

P.S. — If you're ready to see your options, Lotly makes it simple. One form, real solutions, and a team that's on your side. Book a free consultation to see how you can get started today.

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