What is Mortgage Insurance and Do You Need It?

Learn how mortgage loan insurance can affect you and what protections it provides

Across Canada, rising home prices and an ever-shifting economic landscape are making it increasingly difficult and stressful for most people to save comfortably for and purchase a home. For most Canadians, the key to opening the door to buying a home is a mortgage default loan insurance policy. But what is mortgage loan insurance? And if you’ve diligently saved your money, do you need to buy a mortgage loan insurance policy?
 
If you have less than 20% of the asking price, a mortgage lender, or bank, is required by federal law to purchase mortgage loan insurance or CMHC (Canada Mortgage and Housing Corporation) insurance as it is commonly referred to, for what is typically called a high-ratio mortgage. This law applies to mortgage lenders for both new and repeat homebuyers.
 
The purpose of mortgage loan insurance is two-fold: it protects the financial institution that holds your mortgage, and it gives you the opportunity to purchase a home with only a minimum down payment; as low as 5% of the price of the home you wish to buy provided you qualify for that low percentage rate. There are two firms in Canada that provide mortgage lenders with mortgage loan insurance, the CMHC, and Genworth Canada. If your bank is required to purchase mortgage loan insurance for your mortgage, it will pass on the cost of the insurance to you as part of your monthly mortgage payments (which is standard).
 
Avoiding Mortgage Loan Insurance Premiums
Mortgage loan insurance does not protect you, the purchasing homeowner, from defaulting on your mortgage. It is a policy that compensates the bank that provided you with a mortgage in the event you default on your mortgage payments.
 
If you have conscientiously saved funds and have more than 20% of the asking price for the home or property you want to acquire, your mortgage lender is not required to buy a mortgage loan insurance policy, but more often than not, it will purchase the insurance regardless.
 
In this case, you should be able to avoid being charged monthly insurance premiums on your mortgage. If you aren’t, you may wish to consider talking to a different mortgage lender. After all, the mortgage lending business is highly competitive.
 
The Different Types of Mortgage Insurance
There are different types of mortgage insurance policies:

1. Mortgage Loan Insurance, which protects the lender in case of default or foreclosure.
2. Homeowner or Property Insurance Policies are designed to protect the home from fire, flooding, theft and other accidents and damages. These types of policies may be required by the terms of your mortgage contract.
3. Mortgage Life Insurance provides protection for you and your family if you are unable to make your mortgage payments because of a critical illness, disability, or if you as the policy holder should suddenly die. 

Additionally, you should be aware of the difference between personally owned and bank-owned mortgage life insurance policies.

A personally owned mortgage life insurance policy is one you control. Among its many benefits, it protects your family, is fully portable (transferable to any home), gives you the opportunity to shop for better interest rates when your mortgage renewal crops up, and it provides a 30-day grace period for any missed premiums. The value of the insurance does not decrease as the mortgage is reduced.
 
A bank-owned mortgage life insurance policy is the exact opposite. It is designed to protect the bank and is controlled by the bank. It’s a non-convertible, inflexible policy which runs out whenever your house is sold. Moreover, a missed mortgage payment often means this form of coverage will be revoked. Additionally, the value of this insurance policy decreases as the mortgage is reduced.
 
Do you have questions about mortgage insurance or mortgage repayment strategies? Talk to one of our professional, certified insurance and investment advisors. We have the experience and expertise to help. Call us toll-free at 1-800-595-2150.
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