Reverse mortgage vs downsizing: the costs people forget on both sides
Downsizing and a reverse mortgage can both turn home equity into retirement cash, but each has costs people forget: commissions, land transfer tax and moving on one side, compounding interest and estate timing on the other. Here's a side-by-side comparison and a worked example.
Downsizing and a reverse mortgage both turn home equity into cash for homeowners 55+, but they cost money in different ways. Downsizing has large one-time costs up front (real estate commission, land transfer tax on the new home, legal fees and moving), and then no debt. A reverse mortgage lets you stay put with no required payments, but interest is added to the balance and grows over time, reducing the equity left for you or your estate. In our Ontario illustration, selling a $900,000 home and buying a $650,000 one frees about $192,000 after roughly $58,000 in costs; borrowing the same $192,000 as a reverse mortgage lump sum at an assumed 7% grows to about $382,000 after 10 years. The right answer depends on how long you plan to stay, how much you need and when, and what you want to leave behind.
Key takeaways
- →Downsizing costs are up front; reverse mortgage costs grow over time. Compare both over the years you expect to stay.
- →Forgotten downsizing costs: commission and HST, land transfer tax on the new home, legal fees, moving and any new condo fees.
- →Forgotten reverse mortgage costs: interest compounding on the balance, set-up fees, and the time limit your estate has to repay.
- →In our Ontario example, downsizing frees about $192,000 after about $58,000 in costs; the same amount as a reverse mortgage lump sum grows to about $382,000 in 10 years at an assumed 7%.
- →Taking reverse mortgage money gradually can cut interest a lot, since you only pay interest on what you've received.
Short answer: Downsizing often leaves you with more equity over the long run, while a reverse mortgage lets you stay in your home with no required payments, at the cost of interest that grows over time [1]. Downsizing's costs are big and up front: real estate commission, land transfer tax on the new home, legal fees and moving. A reverse mortgage's costs build quietly: interest is added to the balance, so what you owe rises every year and the equity left for you or your estate goes down [1]. The comparison that matters is the reverse mortgage vs downsizing cost over the years you actually plan to stay.
FCAC itself suggests comparing a reverse mortgage with selling and buying a smaller home, renting or moving to assisted living before you decide [1]. This guide does that side by side. To see how we arrange reverse mortgages, visit our reverse mortgage page.
How each option turns equity into cash
Downsizing: you sell your home, buy (or rent) something less expensive, and keep the difference after costs. If the home you sell was your principal residence for every year you owned it, you generally don't pay tax on the capital gain, but you must report the sale and designate the property on your tax return [3].
A reverse mortgage: if you're usually 55 or older, you borrow against your home without selling it, typically up to 55% of its value depending on your age, home and lender [1][2]. You don't make regular payments; the loan and interest are repaid when you sell, move out, the last borrower dies or you default [1]. FCAC notes the money is tax-free and doesn't affect Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits [1]. Our guide to reverse mortgage requirements covers age, home type and spouses.
The costs people forget on both sides
| Downsizing | Reverse mortgage | |
|---|---|---|
| Up-front costs | Real estate commission plus HST, legal fees on the sale and purchase, land transfer tax on the new home [4], moving | Appraisal, set-up, legal and closing costs; may be added to the balance [1] |
| Ongoing costs | Property tax, insurance and upkeep on the new home; condo fees if you buy a condo | Interest added to the balance, so it compounds [1]; property tax, insurance and upkeep on your current home |
| Monthly payments | None if you buy without a mortgage | None required [1] |
| Effect on equity | Locked in at the sale; you own the new home outright | Falls over time as interest builds [1] |
| If you move or sell later | Another round of selling and buying costs | Loan is repaid; prepayment penalties may apply if you repay early [1] |
| For your estate | The home and any savings pass on | Your estate must repay the loan, usually within a set time [1] |
The two traps we see most: on the downsizing side, people underestimate costs because they look only at the price gap between homes. On the reverse mortgage side, people look at the amount they get today and not at the balance in 10 or 15 years. FCAC also warns that the time needed to settle an estate may be longer than the time allowed to repay a reverse mortgage [1].
Weighing a reverse mortgage against selling? A licensed 8Twelve agent can estimate what you could borrow, what it costs over time and how that compares with downsizing, at no cost to you, OAC. Explore reverse mortgage options
Worked example: $900,000 home in Ontario
Illustration: a couple in their late 60s own a $900,000 home in Ontario, outside Toronto, mortgage-free. They want about $190,000 for retirement. The commission rate, legal and moving costs, the reverse mortgage rate and the flat home values are assumptions for illustration.
Option A: downsize by selling for $900,000 and buying a $650,000 home.
| Downsizing cost | Amount |
|---|---|
| Real estate commission, assumed 4% plus 13% HST | about $40,700 |
| Ontario land transfer tax on a $650,000 purchase [4] | $9,475 |
| Legal fees on the sale and purchase (assumed) | $3,000 |
| Moving (assumed) | $5,000 |
| Total costs | about $58,200 |
| Cash freed ($900,000 − $650,000 − costs) | about $192,000 |
Option B: reverse mortgage for the same $192,000, staying in the $900,000 home, at an assumed 7% rate, with no payments.
| Reverse mortgage balance | Taken as one lump sum | Taken gradually ($20,000 up front, then $1,000 a month) |
|---|---|---|
| After 5 years | about $270,800 | — |
| After 10 years | about $382,000 | about $211,900 (on $140,000 received) |
| After 15 years | about $538,900 | — |
| Equity left in the home after 10 years (home value held flat) | about $518,000 | about $688,000 |
Illustrative only, not an offer. Reverse mortgage balances compound semi-annually at an assumed 7% with no payments; set-up costs, which FCAC says may be added to the balance, are not included. Ontario land transfer tax uses the provincial rates; Toronto adds a municipal tax. Calculated in Python.
What it shows: after paying about $58,000 to move, the downsizers own a $650,000 home with no debt. With a lump-sum reverse mortgage, the couple stays put, but after 10 years their remaining equity (about $518,000 if the home's value doesn't change) is lower than the downsizers' home, and the gap widens over time. If the home's value rises, both households benefit, and the reverse-mortgage household benefits on a more expensive home. Taking money gradually changes the picture a lot, because you only pay interest on what you've received; FCAC notes regular-payment options typically pay around $1,000 a month after an initial amount of about $20,000 [1].
When a reverse mortgage may fit better
- You want to stay for health, family or community reasons, and moving costs would eat into the gain.
- You need a modest amount, or need it gradually, so the balance grows slowly.
- Local prices don't leave room to downsize: the smaller home or condo you'd want costs nearly as much as yours.
- You're older, so the years of compounding are fewer (and the amount you can borrow depends partly on your age [1]).
When downsizing may fit better
- The house is more than you need or harder to maintain.
- Leaving maximum equity to your family is a priority.
- You'd want to move within a few years anyway, so you'd pay selling costs later plus reverse mortgage interest in between.
- You need a large amount, beyond what a reverse mortgage would allow.
Step by step: deciding with a broker and your family
- Decide how long you'd like to stay in your current home: 3, 10 or 20 years.
- Price your downsizing costs with real quotes for commission, legal fees, land transfer tax and moving. Our land transfer tax calculator helps with the last one.
- Get a reverse mortgage estimate for the amount, rate, fees and payout option.
- Project both over the same years, with and without home price growth.
- Involve family and get independent legal advice, which FCAC suggests, and some provinces require [1].
- Compare other options too, such as a HELOC if you have income to make payments; our home equity takeout guide compares them.
From our desk: Many of the 55+ homeowners we speak with start out sure they'll downsize, until they price the move. Others start set on a reverse mortgage and change their minds when they see the 15-year balance. Running both sets of numbers for your own home and timeline is the step that settles it.
A reverse mortgage and downsizing both unlock equity; the difference is when you pay. Downsizing costs you up front, a reverse mortgage costs you over time. Price both for your home and timeline, and involve your family before you decide.
Run the numbers: estimate land transfer tax on your next home with our land transfer tax calculator, or read our reverse mortgage requirements guide.
This article is for general information only and isn't financial, legal or tax advice. Rates, products and terms change without notice and are available on approved credit (OAC). The rate and terms you qualify for depend on your individual financial situation, including credit, income, property and loan-to-value. "Best rates" means the most suitable options available for your situation, not a guarantee of the lowest rate. Example rates and payments are for illustration only, as of October 2026, and are not an offer. 8Twelve Mortgage arranges mortgages through 65+ lenders and does not lend directly. Licensed across Canada — see our licences.
Example rates, costs and balances are for illustration only, as of October 28, 2026, and are not an offer. Your actual reverse mortgage amount, rate and fees depend on your age, home, lender and situation, OAC. Reverse mortgage interest accrues and reduces your home equity over time. We recommend involving family and obtaining independent legal advice. This article isn't tax advice; speak with a tax professional about your situation.
Frequently asked questions
Sources
- Reverse mortgages - FCAC
- Borrowing against your home equity - FCAC
- Principal residence and other real estate - Canada Revenue Agency
- Land Transfer Tax Act, R.S.O. 1990, c. L.6, s. 2 - Government of Ontario
Last reviewed on October 29, 2026