Mortgage insurance
When buying a home, most of us take out a mortgage to finance the purchase. Depending on the size of the mortgage and other factors, there are types of mortgage insurance that may be involved, such as mortgage life insurance, mortgage loan insurance and mortgage disability insurance.
- Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a minimum down payment.
- Mortgage life insurance pays the remaining balance on your mortgage to the lender in the event of your death.
- Mortgage disability insurance will make mortgage payments to your lender if you cannot work due to a severe injury or illness.
Mortgage loan insurance
Typically, 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 (also known as "mortgage default insurance") for amounts that exceed 80% of the value of the home or purchases with less than 20% down payment.[1]
For mortgages with down payments between 5% and <20%, mortgage loan insurance costs between 2.8% and 4.0% of the loan value[2]. The insurance premium can be paid as a lump sum or, more commonly, added to the loan (in which case interest will be charged by the lender at the same rate than on the rest of the loan).
Mortgages with a down payment of 20% or more do not typically require loan insurance, but CMHC offers it nonetheless. Scotiabank, for example, indicates that "default insurance may also be required ... when a borrower has more than a 20% down payment, if the property is in a remote location or if the borrower is qualifying under a special program considered a higher risk".[3]
Mortgage life insurance
Mortgage life insurance, also know as creditor insurance[4], is offered by most banks and lending institutions. It is a life insurance policy that pays the balance of your mortgage to the lending institution if a person listed on the mortgage passes away.[5] A more cost efficient and flexible way of achieving the same goal is to use term insurance.
Comparison with term insurance
An excellent alternative to mortgage life insurance is using term life insurance. The logic of buying term life insurance is to insure your paycheque, instead of your mortgage. If the paycheck is replaced by the life insurance proceeds, then mortgage payments -- and all the other things previously covered by your paycheque -- can still be paid. Also, for term life insurance, several quotes can be obtained (e.g. from a broker), and the cost will likely be lower than that of mortgage insurance. The following table compares the two options:[4] [6] [7]
| Aspect | Mortgage life insurance | Term insurance |
|---|---|---|
| Provider | Your mortgage lender | Life insurance company |
| Competitive market | No (you get one offer) | Yes (you can get several quotes) |
| Who gets paid if you die | The mortgage lender | Your named beneficiary or your estate |
| Amount of payout | Declining with mortgage balance | Constant in nominal dollars, during the term |
| Flexibility in use of payout | Applied to the mortgage balance | Can be used for any purpose |
| Premium | Typically higher, not guaranteed | Typically lower, guaranteed for the term |
| When you transfer or renew your mortgage | You have to renew your policy | No impact |
| Easy to obtain | Yes | More work, but more flexible and typically less expensive |
According to MoneySense magazine, "The only circumstance where mortgage life insurance — and its near instant approval — makes sense is when you have a disability, disease or lifestyle that makes it difficult, if not impossible, to obtain other insurance."[8]
Mortgage disability insurance
Mortgage disability insurance is a specialized version of disability insurance. In the event of a disability, it will cover your mortgage only, for a limited time. Individual disability insurance instead covers a percentage of your employment income and can last longer.
Mandatory or optional?
Mortgage loan insurance is mandatory for certain loans (see above).
On the other hand, the Financial Consumer Agency of Canada notes that the following insurance products are optional, and that the lender can't force you to buy them in order to obtain a mortgage:[9]
- Mortgage life insurance
- Mortgage liability insurance
- Critical illness mortgage insurance
See also
References
- ^ Who Needs Mortgage Loan Insurance? | CMHC, viewed March 11, 2015.
- ^ CMHC, How much does CMHC Mortgage Loan Insurance cost?, viewed February 3, 2018; see also Mortgage Default Insurance or CMHC Insurance for an easier to understand premium table.
- ^ Scotiabank, What you need to know about Mortgage Default Insurance, May 27, 2014, viewed March 11, 2015
- ^ a b Rino Racanelli, Why You Shouldn’t Be Caught Dead With a Bank’s Mortgage Insurance, Canadian Money Saver, February 2012(subscription required); updated in 2021: Seven Reasons To Avoid Bank’s Mortgage Insurance(subscription required), CMS June 2021 issue
- ^ ratehub.ca, Mortgage Life Insurance, viewed February 5, 2018
- ^ Carola Vyhnak, Mortgage vs life insurance: Which is best?, Toronto Star, May 3, 2012, viewed January 14, 2017
- ^ Canadian Capitalist, Mortgage Insurance versus Life Insurance, April 22, 2009, viewed January 14, 2017
- ^ Ask MoneySense: Do I need mortgage life insurance?, October 13, 2010, viewed January 14, 2017
- ^ Financial Consumer Agency of Canada, Optional mortgage insurance products, modified December 1st, 2023, viewed December 26, 2024.
External links
Mortgage life insurance
- Toronto Star, Mortgage vs life insurance: Which is best? (May 3, 2012)
- Canadian Capitalist, Mortgage Insurance versus Life Insurance (April 22, 2009)
