What is mortgage insurance?
Buying a home in Canada is an exciting milestone in your life. It’s also an expensive one. Making the financial commitment to buying a place to call you own comes with several costs beyond the purchase price of the home. There are property taxes to pay, moving expenses to consider, and mortgage insurance to buy.
What is mortgage insurance?
Mortgage insurance works very similar to other types of insurance. Its purpose is to protect your biggest asset in case of an unfortunate event. There are two types of mortgage insurance in Canada, and they each protect a different party. You don’t need to choose between one or the other because they compliment each other.
Mortgage default insurance protects the lender (the bank) if you as the homeowner can no longer make the payments. Mortgage life insurance protects your loved ones and pays off the balance of the loan in case of an unforeseen event.
Mortgage loan default insurance with CMHC
Mortgage loan default insurance protects the lender in case you as the homeowner default on the loan. It’s mandatory for some owners and the cost of the insurance premiums can be included in your monthly mortgage payments.
According to the Canada Mortgage and Housing Corporation, “Lenders require mortgage loan insurance for loans made to anyone that wishes to purchase a home with less than 20% of the purchase price. The Canadian Bank Act prohibits most federally regulated lending institutions from providing mortgages without mortgage loan insurance for amounts that exceed 80% of the value of the home or purchases with less than 20% down payment. Through your lender, CMHC Mortgage Loan Insurance enables you to finance up to 95% of the purchase price of a home.”
You will have to buy this mortgage insurance if you don’t have a big enough down payment.
Protecting your asset with mortgage life insurance
If you have less than 20% for the down payment on your home, you are required to purchase mortgage loan default insurance with CMHC; it protects the lender. Life insurance on the mortgage amount protects your family in case you as the homeowner pass away.
If the primary owner or co-owner (if you purchase the home with your spouse) passes away, life insurance pays off the outstanding mortgage loan balance. Although this type of mortgage insurance is not mandatory, it can be useful in some circumstances.
Take a minute and think about what would happen to your family if you passed away. Would they be able to keep the house? Could your spouse afford the monthly payments on their own? For many families the answer is no.
Spouses don’t want to leave their loved one with the financial burden of trying to make ends meet on one salary and parents don’t want to think about their children having to leave their home after they’ve already lost a parent. Mortgage life insurance helps relieve all that stress. It is an additional cost, but for most people it’s a non-negotiable expense because it protects your two most valuable assets: your family and your home.
Life insurance can be purchased directly through your lender at the time of mortgage approval (the mortgage representative will ask you) or it can be purchased through an independent insurance advisor. In many cases, regular life insurance can accomplish the same thing. Double-check your life policy to make sure that it is enough to take care of your family and home. If it’s not, consider mortgage life insurance.