Appendix I: Reverse mortgage calculation
Archived Content
Information identified as archived is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please "contact us" to request a format other than those available.
A reverse mortgage is a loan designed for homeowners aged 60 or older. It is secured by the equity in the home, which is the portion of the home's value that is debt-free. It allows homeowners to obtain cash without having to sell their home. The loan usually amounts to 10% to 40% of the current value of the dwelling. 1
To estimate the lump sum that a reverse mortgage can provide, it is assumed that the maximum value of the loan is based on 75% of the expected value of the home at the death of the homeowner, after allowing for an annual 2% appreciation. 2 The present-day loan is then calculated using a deferred payment method that includes interest as well as principal.
The loan obtained from the reverse mortgage is assumed to be invested in a life annuity to produce an annual income stream until death of the homeowner. This annuity is derived using the formula in the main text.
The interest rate on the loan via reverse mortgage is assumed to be higher than the rate used in the derivation of the annuity (2 percentage-point spread).
- Date modified: