How Mortgages Are Insured

Mortgages can be insured in different ways. Mortgage default insurance works only for a lender. You must have it if you put down less than a required minimim.

Regardless the size of your down payment there're two other insurance products to consider which will also protect you. While lenders may try to talk you into buying mortgage life insurance, most of homeowners find life insurance a much better deal.

What Is Mortgage Insurance

If your down payment is no more than 20% and at least 5% you have to buy mortgage default insurance, often referred to as mortgage insurance.

Mortgage insurance protects only the bank. When you default on your mortgage the bank will take legal action to sell the property and recover the outstanding balance, unpaid interest and legal fees.

If your lender doesn't retrieve what is owing, the mortgage insurer will pay the amount of the shortfall and then go after you to recover the money.

You don't have to look for the insurance provider. Your bank will arrange the purchase of the policy from the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial or Canada Guaranty.

In order to get insured your GDS ratio has to be at most 32%, the TDS ratio must not exceed 40%, and the down payment has to be yours.

Premiums are a percentage of the loan. The lower your down payment, the more you will have to pay. Your fee may also be influanced by other factors like the length of mortgage amortization, home value, and your employment status.

(House Value %)
(Mortgage %)
up to 80 %1.25 %
up to 85 %1.80 %
up to 90 % 2.40 %
up to 95 %3.60 %

The sales tax is due up-front, but your insurance doesn't have to be paid in a lump-sum. Premiums can be added to mortgage payments, and you will pay interest on the total amount.

While mortgage insurance protects lenders, it also benefits homebuyers. Without it, many of them might not be able to obtain their financing or they would have to pay a much higher interest.

Mortgage Life Insurance Explained

Mortgage life insurance pays the owing balance to the bank when you pass away, become critically ill or disabled.

Most likely, your lender will ask if you would like to buy it. You have to answer few basic health questions to be approved, and premiums can be added to monthly payments.

They'll tell that not having your mortgage insured is very risky. This is undeniably true, but they won't say there are better insurance products available to most consumers.

That's because mortgage life insurance is more beneficial to a lender than to you. And here are the arguments why:

  • Post claim underwriting can lead to your claim being denied. After a claim is made the insurance company will dig deep into your medical history to decide if you qualify for benefits.

  • Benefits are paid for the amount owing. Your coverage shrinks as you repay the balance every month, but premiums remain the same.

  • You will have to buy a new policy when you switch or renew the mortgage. Your fee will go up because you got older when you reapply, and if your health declined you may be rejected.

  • The bank is a sole beneficiary. If you pass away your closest relatives will get nothing. All the money will be used to pay the outstanding balance.

Life Insurance vs. Mortgage Life Insurance

Life insurance pays your beneficiaries a lump-sum of money when you die. There are important reasons why life insurance may offer a better protection for your mortgage:

  • How much you are insured for is up to you. You can choose your beneficiaries who get paid upon your death, not your lender

  • Your beneficiaries decide what to do with the payout. They can continue to pay mortgage installments, or use insurance proceeds to cover other expenses.

  • You can get coverage for a set number of years. Term life insurance for the duration of your mortgage costs considerably less than mortgage life insurance.

  • The amount of coverage will stay the same through the life of the policy,which is portable because it is attached to you not to your debt.

However, it takes more time to obtain life insurance and medical criteria are stricter. A long term disability and critical illness aren't covered, and you'll have to consider buying an additional policy.

Before you decide anything research life insurance quotes online, so you can compare premiums for the coverage which you need.

Although life insurance has many advantages, it would be too simplistic to dismiss mortgage life insurance as something of no value for every mortgage holder.

When life insurance is denied to you for health reasons mortgage life insurance remains a logical solution.

If you are overweight, smoke cigarettes, or have a drug addiction you'll be much better off with mortgage life insurance than with no insurance at all.

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