Mortgage insurance makes sure your family will never lose the biggest asset you will likely ever own: your home. And at a time when mortgage debt makes up a good chunk of our country’s 176.9 percent household debt ratio (according to Statistics Canada), this type of coverage can be invaluable.
Why? Because mortgages typically last for decades, and should something happen to you during this time the lender still must be paid, even if it means selling the house. Mortgage insurance ensures that the mortgage loan is paid off.
There are two main types of mortgage coverage for you to consider; lender mortgage insurance is provided by financial institutions like banks and credit unions who are providing you with the loan, and is fundamentally different from personal mortgage insurance: that type of coverage is provided by insurance companies and relies on a combination of policies (typically, term life, permanent life, and critical illness insurance) to protect you.
A third type of mortgage insurance to be aware of is mortgage loan insurance (also known as mortgage default insurance), which comes into play if you intend to buy a home with a down payment of less than 20 percent: it is provided by the Canada Mortgage and Housing Corporation as well as private insurers and protects your lender in case you can’t make your payments. Essentially, these agencies pay out the lender if you default on your payments for whatever reason. Such coverage enables banks and lenders to offer mortgages and lower interest rates to first-time homebuyers.
It is crucial that you consult a qualified financial advisor to determine what is better for you, as mortgage insurance through your bank and personal mortgage insurance that you buy directly from an insurance company each have advantages and disadvantages. For example, bank mortgage insurance is convenient and will cover the amount owed on your mortgage in the event of death, ensuring that your beneficiaries will be able to pay off your home and keep it. However, the premiums you pay do not decrease over time even though your coverage does, and the money paid out by the policy must be used to pay off the mortgage.
Personal mortgage insurance using a combination of policies is often significantly more affordable than bank mortgage insurance, and the premiums plus the amount your beneficiaries receive stay the same through the duration of the policy. Also, your beneficiaries can decide what to do with the payout meaning they don’t have to pay off all of the debt, they can choose to pay part or all, and keep any remaining balance in the bank to help cover living expenses and things such as property tax and home maintenance costs. However, to qualify for personal insurance this requires a more detailed health screening which provides certainty at claims time that your family will receive the proceeds.
All things considered, financial advisors tend to have personal mortgage insurance over bank mortgage insurance because it offers the same protection throughout the riskiest years of the mortgage loan but puts you and your family in the driver's seat. You can get coverage well beyond the amount of your mortgage, pick your own beneficiary (depending on the combination of policies you use), and the payout never reduces and can be applied to whatever your beneficiaries choose. Also, your policy stays with you if you transfer your mortgage to another company: there’s no need to re-apply or prove your health is good enough to be insured, as is the case with mortgage insurance provided by banks.
Consulting a financial advisor will also enable you to determine which insurance policies will work best for your mortgage circumstances. By using critical illness insurance, the money goes to you. With life insurance, it goes to whomever you name as the beneficiary. For many people, either option is far more desirable than the money going to the lender under a mortgage insurance plan.
The bottom line is there are many options to suit your specific needs – as well as protect yourself, your beneficiaries, and your home.
