Congratulations! The offer is accepted on your new home.
Before you get a chance to cut keys or go on an IKEA run, a call comes on your phone.
It’s your mortgage provider! And they want to talk to you about protecting the biggest financial decision you’ve ever made: “Do you have a few minutes to talk about mortgage insurance?”
Before you accept the call, take a few minutes and get the low down on the two most adult words you’ve ever seen next to each other: mortgage and insurance.
What is mortgage insurance?
In Canada, mortgage insurance is a protection product, typically offered by your mortgage lender. In the unfortunate event of your death with your mortgage loan still outstanding, this insurance will pay off the debt of your mortgage loan. It is also referred to as mortgage life insurance.
For example, let’s say you are purchasing a house for $100,000.
You put together a 15 percent down payment, and the amortization period is 25 years. That leaves a $85,000 mortgage loan that you need to pay off over the next 25 years (ignoring other variables which come with home ownership).
If something happens to you within this 25-year period, your lender still expects to be paid back that mortgage loan . To do this, your family, loved ones, or estate are expected to come up with that cash by dipping into their savings, or selling the property to settle the mortgage loan.
Conventional mortgage life insurance ensures that mortgage loan is paid off in these circumstances; some policies can even cover the mortgage loan in case of a disability or a serious illness.
It should not be confused with mortgage default insurance or mortgage loan insurance.
What is mortgage default insurance?
If your initial down payment for your mortgage is less than 20 per cent of your purchase price, and your potential home price is below $1-million (the maximum allowed price to qualify for default insurance), you are required to purchase mortgage default insurance (also known as mortgage loan insurance). Mortgage default insurance is offered by providers such as the Canada Mortgage and Housing Corporation (CMHC), a crown corporation or private mortgage insurers like Genworth Financial Canada and Canada Guaranty.
CMHC insurance pays out the lender if the borrower (in this case you) defaults on their payments for whatever reason (not just death) – there is no payout to you, and the CMHC can later come after you or your estate for these costs, as you are still liable for them.
It enables banks and lenders to offer mortgages and lower interest rates to first-time home buyers with less than 20 percent for a downpayment. It protects the lender in case these borrowers default and it lets a larger number of people become homeowners.
To learn more about how mortgage default insurance works and how much it costs when your downpayment is less than 20 percent, head to our CMHC Mortgage Default Insurance Calculator.
Is lender-provided mortgage insurance mandatory?
No – but you might have noticed your lender making it almost seem like it.
Can I cancel mortgage insurance?
Of course you can cancel mortgage insurance. However, like with all insurance, we suggest you don’t cancel it unless you have alternative coverage available and ready to replace it.
Can I use life insurance to replace mortgage insurance?
Yes, term life insurance can provide the same security as traditional mortgage insurance plus all the benefits you rightfully assumed would come with it but are now seeing is not the case.
How does protecting a mortgage with life insurance work?
Mortgage protection through term insurance (also referred to as private mortgage insurance) offers the same security throughout the riskiest years of your mortgage loan, with several additional benefits not offered by lender-provided mortgage life insurance.
You can get coverage well beyond the amount of your mortgage loan (more on that later). You also get to pick your own beneficiary, instead of paying for insurance to protect the lender.
Instead of a diminishing payout linked to your remaining mortgage loan, your beneficiaries are entitled to a tax-free, lump-sum payment which never reduces and can be applied to whatever they choose through mortgage protection insurance.
Where do I get mortgage insurance?
You can only get it from the lender who provided your mortgage loan. With 73 percent of mortgages coming from Canada’s Big 5, it mostly ends up being your bank or financial institution.
However, term insurance is available from several companies nationwide, and we happen to know a simple, quick way to check out the best quotes and find the best insurance company for you.
How do I pay for mortgage insurance?
With the lender-provided option, you pay the insurance premium alongside your mortgage payments. Term life insurance can similarly be paid monthly, with an added flexibility of paying for it yearly.
How much mortgage insurance do I need?
Unfortunately, you don’t get much of a choice if you go through your lender – the insured amount is tied to the value and term of your mortgage loan. However, mortgage protection through term insurance lets you expand the coverage for other needs (such as child care, education needs, your family’s future living expenses, funeral expenses and more).
Why is mortgage insurance expensive?
With lender-provided mortgage insurance, the price is inflated because there is no underwriting – the process an insurance company goes through to determine the appropriate fees for taking on the financial risk of your death.
Without this stringent evaluation process, they are taking on the risk of your policy paying out, you suing them in the rare case it doesn’t, and paying percentages and finders fees to whatever other parties were involved in selling you the policy.
Why is life insurance cheaper than mortgage insurance?
Mortgage protection through term insurance goes through full underwriting. The potential payout is bigger and more consistent, so an insurance company makes sure you are as insurable as possible. If insuring you is less risky, then they pass some of those savings on.
Is mortgage insurance guaranteed?
We hate to be so constantly negative here, but no. With lender-provided mortgage insurance, the claim is evaluated at your death to see if there is any reason why it should not be paid out. For instance, if you had a health condition at the time of getting the mortgage insurance and it was not disclosed, your claim can and most likely will, be denied.
Not only does that mean a lack of security, but an added stress on your loved ones and estate should they have to fight for a claim they feel is rightfully theirs.
Term life insurance in most cases is guaranteed coverage, which means a much higher probability of your claim being paid without any hassle.
What happens to my mortgage insurance if I sell my house?
In the case of lender-provided mortgage insurance, it is tied to the lender. If you sell your house, switch mortgage providers, or anything else that ends your relationship with that particular debt, the corresponding mortgage insurance policy is cancelled.
Term insurance offers consistent protection throughout your housing situation. The agreement is independent of your property.
Does my beneficiary have to spend the money on the mortgage?
With the lender-provided option, you don’t have any say in the matter. Once the policy is activated, all transactions are handled by the suits at the bank or lender’s office until they deliver a deed to your family or estate.
Term life insurance instead gives your beneficiary the freedom to do what they want with the payout. They may want to pay off the mortgage or use the funds on other needs at that time. Ultimately, you are leaving them the choice.
I don’t want to read any of this, just show me a checklist that sums everything up!
Term life insurance vs. Mortgage Insurance – which is better?
So what do I choose between mortgage insurance and mortgage protection?
We laid out a pretty good case for why we believe mortgage protection through term life insurance is the right choice for Canadian homeowners.
Armed with the above knowledge and our insurance calculator, you’re able to make the right decision for you, your family, and your home.
Call us at 1-888-601-9980 or book time with our licensed experts.