Should You Get Mortgage Insurance?
What is Mortgage Insurance and What Types of Insurance are Worth Investing In
Have you ever felt a bit confused when a bank starts promoting “mortgage insurance” right after you’ve gotten a mortgage? After all, the Canada Mortgage and Housing Corporation (CMHC) requires mortgage insurance on down payments below 20% of the house’s purchase price.
So, what is the mortgage insurance being offered by banks actually for, then? Do you really need it? How, exactly, do these two “mortgage insurance” options differ?
Let’s take a closer look at the confusion surrounding these terms.
MORTGAGE INSURANCE VS. MORTGAGE PROTECTION INSURANCE: WHAT’S THE DIFFERENCE?
Mortgage default insurance (also known as mortgage loan insurance) from the Canadian Mortgage and Housing Corporation (CMHC), Genworth, or Canada Guaranty is mandatory for homebuyers making a down payment that is less than 20% of the home’s purchase price—between 5% (the minimum allowable down payment) and 19.99%.
This CHMC insurance protects lenders if a borrower stops making payments on their mortgage loan. While it protects the lender in case the borrower defaults on the mortgage, it is a cost to the borrower.
Mortgage protection insurance (also known as mortgage life insurance, or life, disability, or critical illness mortgage loan insurance) is not mandatory for homebuyers, and, in fact, isn’t technically insurance for your mortgage.
This mortgage insurance is a type of life insurance, covering the borrower’s debt should they die or become disabled and can no longer pay their mortgage.
Many banks will offer borrowers this type of insurance when they sign up for a new mortgage—much like the insurance they sell on other loans and credit cards.
MORTGAGE DEFAULT INSURANCE 101
Here’s everything you need to know about mortgage default insurance:
Get a Mortgage for Up to 95% of the Home Price
With CMHC mortgage insurance, you can get a mortgage that covers up to 95% of the price of a home. This insurance also helps you get a reasonable interest rate on your mortgage even if you only make a small down payment.
So, even if you can’t afford to save up for a large down payment, you can still have an opportunity to buy a home.
Mandatory on Down Payments Below 20%
If you want to buy a home, but your down payment is less than 20% of the home price, then you must get mortgage default insurance. . However, to qualify for this mortgage loan insurance, you will need to have a minimum down payment based on the home’s purchase price.
- For homes that cost $500,000 or less, you need a minimum down payment of 5%; and,
- For homes that cost more than $500,000, you need a minimum down payment of 5% for the first $500,000 and 10% for the remainder of the cost.
Note that for homes that cost $1,000,000 or more, mortgage loan insurance is not available, so 20% down payments are required.
Protects Lenders in Case of Default
If you can’t make your mortgage payments and the lender is forced to take over your home, the mortgage default insurance protects your lender. If your mortgage lender takes your home, the lender will process a claim with the default insurer who insured your mortgage and the insurer will take care of taking over the property. This means the lender will recuperate the funds they lent to you. In short, due to this mortgage default insurance protection, the risk of default is passed on to the mortgage insurer and lenders can offer lower mortgage interest rates because their level of risk is lowered.
Added to Your Payments or Paid Up Front
Although your lender pays an insurance premium on your mortgage loan insurance, you are responsible for this cost. The mortgage default insurance is added to your mortgage loan and you have a new higher mortgage balance. This mortgage is now insured until the mortgage is paid off.
The cost of the insurance is a percentage of the mortgage and is based on the size of your down payment.
- When putting 5% down payment of the purchase price, the insurance premium represents 4% of the loan amount
- When putting 10% down payment of the purchase price, the insurance premium represents 3.1% of the loan amount
- When putting 15% of the purchase price as down payment, the insurance premium represents 2.8% of the loan amount
May Be Applicable if You Move
If your mortgage is CHMC-insured and you plan to buy a new house, you may have a mortgage portability option. This portability option is available for repeat users of CMHC-insured mortgage financing. And it helps borrowers save money on mortgage insurance for new homes. This is also offered by the other default insurers.
SHOULD YOU GET MORTGAGE PROTECTION INSURANCE?
Mortgage protection insurance is like life insurance and can help you in several surprising ways. The problem with it is that a lot of people simply misunderstand what mortgage protection insurance is. In the event of death or disability, mortgage protection insurance makes sure your mortgage is protected and doesn’t impact your family.
While life insurance and term life insurance provide financial security and stability in many ways, mortgage protection insurance isn’t without its benefits.
Let’s look at some of the ins and outs of mortgage protection insurance to help you determine if it’s right for you.
Payouts Shrink As You Pay Off Your Mortgage
A mortgage protection insurance policy will only cover the amount of your mortgage debt. So, as you pay down your mortgage, the insurance payout amount will decrease even though the price you pay for your insurance premium stays the same.
And this makes sense! As your mortgage is paid off, it makes sense that you’d have less of a payout—there’s less to insure, after all.
But at the same time, if you were to get term life insurance on a 10-year term, your insurance costs are likely to increase at the close of that term. You’re getting a stable coverage amount, this is true, but at an increasing cost.
While mortgage protection insurance has declining coverage over time, your expenses stay the same, and you can enjoy many similar protections.
Premiums
Mortgage protection insurance available through a bank creditor can be more expensive than traditional life insurance, but premiums are usually comparable to term 10 and term 10 insurance coverage.
Are you worried about premiums going up when it’s time to renew? This doesn’t usually happen if you take creditor life insurance through a bank, but this isn’t portable; if you move your mortgage to a different lender, your insurance coverage will be cancelled. If you get mortgage protection insurance with this new lender, then the mortgage protection will likely cost more as you’re now older.
In fact, the mortgage protection insurance offered by brokers is usually about the same cost as term insurance. What’s more, it’s usually portable between lenders.
As a broker, the companies I work with are insured by on Canada’s largest insurers, Canada Life. In most cases, files are underwritten, just like term insurance.
Tied to Your Mortgage and Home
Unlike traditional life insurance, mortgage protection insurance will only go toward paying off your mortgage. So if you can no longer pay your mortgage, there is no flexibility for what your beneficiaries can do with the insurance payout.
But with life insurance, your beneficiaries will have financial security and flexibility with their options. For example, they can pay off the mortgage with the payout, sell the home, keep the home, or spend the money however they see fit.
Still, it’s entirely possible your beneficiaries will poorly manage funds either way!
Think of it this way: mortgage protection insurance makes sure your home is paid off. Other debts and obligations are covered through term or life insurance, and helps your widowed partner live the same lifestyle they’ve become accustomed to.
It’s not necessarily one or the other—both can help!
Who Gets the Payout?
With a regular life insurance policy, you choose the beneficiary. But with mortgage protection insurance, the bank is the beneficiary. So if you pass away, all the money you paid into the insurance will go to the bank whereas, with life insurance, your beneficiary will receive the full payout and decide how to spend the money.
And again—this makes sense, given that you’re insuring your mortgage itself. You’re basically making sure your home payments are covered in the event something happens to you.
Post-Claim Underwriting
A bank’s mortgage insurance may use post-claim underwriting, which means they will decide if you qualify for a claim only after you submit the claim. They could find that you have violated the insurance contract, deny your claim, and pay out nothing to you or your family if you can no longer pay your mortgage.
But when you work with a mortgage broker, insurance coverage is handled through third-party providers, which means most files are underwritten, just like term insurance.
Mortgage protection insurance is an important coverage to have in case of emergency. You can pair it with other forms of insurance coverage to help ensure safety and security for you and your family in case of an emergency.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.