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Apr 28

Should You Get Mortgage Insurance?

Author: Chris Allard

Category: Mortgages & Rates

Key Takeaways

While the mortgage default insurance offered by CMHC is intended to protect the lenders in case you default on your payments, mortgage life insurance is all about protecting your loved ones in the event of your death. Mortgage default insurance is mandatory for any homebuyers putting down less than 20% of the property value, but mortgage life insurance is optional and can often be purchased at the time of the mortgage financing.

Even though mortgage life insurance is optional, it is well worth considering. Unlike personal life insurance, mortgage creditor insurance payment will go directly to the lender, paying off the remaining mortgage balance and ensuring that your family’s home expenses are covered in full.

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.

What Is Mortgage Life Insurance?

Mortgage life insurance is a special insurance coverage offered to mortgage borrowers, designed specifically to pay off or pay down the mortgage in case of the borrower’s death. The insurance payout will go directly to the lender, covering the mortgage balance and making sure that your family can stay in their home even if the primary income used for mortgage payments is no longer available.

What Is the Difference Between Mortgage Insurance and Life Insurance?

Mortgage life insurance features an easy application process and can be convenient to get from your mortgage broker or at the bank when you are arranging your mortgage. It can be considerably easier to qualify for as opposed to personal life insurance and often includes much lower premium payments. However, mortgage life insurance only covers the outstanding mortgage balance, with the death benefit going directly to the mortgage lender.

The key difference between life insurance vs. mortgage insurance is that with personal life insurance, you can receive more than just mortgage protection. Your loved ones will receive a tax-free death benefit, which can be used to cover any expenses they may need covered. As such, your beneficiary may use the money to pay for other debts, funeral costs, the cost of child care, and more.

Why Should You Get Mortgage Life Insurance When Young and Healthy?

When it comes to obtaining mortgage life insurance, it is important to apply for coverage while you are as young and as healthy as possible. As you age, and as your health naturally deteriorates, your insurance rates will only go up, – and even your chances of becoming insured altogether can be compromised.

Types of Mortgage Insurance Coverage

Your mortgage life insurance policy may include only life insurance or feature optional add-ons like critical illness or disability insurance.

Life Insurance

Mortgage life insurance is an optional insurance product intended to pay the balance of your mortgage to the bank or mortgage lender upon your death. If you have dependents or a spouse living with you, they will be able to continue staying in the house even after the primary income used to make mortgage payments is gone.

Critical Illness Insurance

Critical illness insurance is intended to cover your mortgage payments if you are not able to work due to a severe illness. In the event of a critical illness outlined in the insurance policy, the insurance company will pay the outstanding balance in total up to $500,000.

Disability Insurance

If you are not able to continue working due to an injury or disability, the insurer will make payments towards your regular mortgage payment for up to 24 months. Similarly, the insurance policy will include a specific list of injuries or disabilities covered or excluded under the policy.

Secure Your Mortgage Life Insurance Today

Now that you have a better understanding of mortgage life insurance policy, why not take proactive steps to protect your loved ones from the unexpected? Get in touch with us today to get a personalized quote and make sure that mortgage payments are covered for your family, no matter what.

Key FAQs on Mortgage Creditor Insurance

What is mortgage creditor insurance?

Mortgage creditor insurance is a safety net for you and your family, making sure that your loved ones will be able to pay down your mortgage – or keep up with regular payments – if you become disabled, are diagnosed with a critical illness, or pass away.

Who should consider it?

Mortgage creditor insurance is designed primarily for two groups of people:

  1. It should be considered by individuals who have recently gotten married or had a child and have not conducted a financial health check-up in a while.
  2. Mortgage creditor insurance is a good option to keep in mind for any individual navigating their insurance needs, as it offers an effective short-term strategy to safeguard your home while you may be refining your longer-term financial plans.

Can I afford mortgage insurance with a hefty mortgage payment?

There are numerous options for mortgage insurance coverage, with some companies offering flexible options for partial coverage. While your mortgage will not be insured in full, your day-to-day financial stress will be relieved with much smaller insurance premiums.

How does disability coverage complement life insurance?

Disability coverage is typically offered through employment benefits, covering a fraction of your income in case you are not able to work due to an illness or disability and enabling you to meet your living expenses.

Personal life insurance, on the other hand, will pay the death benefit to your loved ones in case you pass away, making sure that they can still make mortgage payments and maintain the standard of living they are used to.

Do I need both life insurance and mortgage life insurance?

Whether you need both life insurance and mortgage life insurance will depend on your circumstances and the insurance policies in question.

For instance, the death benefit provided by a life insurance policy may be enough to cover your family’s living expenses, funeral expenses, and more, – but not enough to pay off your mortgage in full. In that case, mortgage life insurance may be used as a supplement, to ensure that the mortgage is covered, and personal life insurance proceeds can be used for other expenses.

Why should I consider mortgage creditor insurance, even if my financial advisor is skeptical?

Mortgage creditor insurance, along with additional options like disability and critical illness coverage, provides critical protection in the event of the unexpected. It ensures that your mortgage will be paid off if you pass away or are unable to work due to a health condition, which means that your family won’t lose their home.

Even if your financial advisor has reservations, mortgage creditor insurance should be considered due to its simplicity of application, stable and relatively low premiums, and, of course, the peace of mind that comes with knowing that your loved ones will be able to stay in their family home even after you pass away.

 

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