The benefits of mortgage insurance

As we all know, buying a home is one of the most important transactions you will ever make. You’ve found your dream home and have bought home insurance to cover your property and legal liability. So now, all you have left to do is unpack your boxes and settle in. Not so fast!

Getting insurance for your mortgage

What would happen if your spouse were to pass away suddenly? Would you be able to cover your mortgage payments and your expenses? Mortgage insurance enables you to pay back all or a portion of your financial obligations in the event of death.

You can also enhance your coverage to keep a disability or critical illness from having a major impact on your mortgage payments, finances and lifestyle. This will ensure that your investment is protected against life’s little surprises so you can focus on your family without worrying about money.

What is mortgage insurance?

The term “mortgage insurance” can refer to several different products, including mortgage life insurance and mortgage disability insurance. It covers your family for mortgage payments in the event of your death or inability to work. So if your household suddenly loses its main breadwinner to an illness, injury or death, you won’t be caught unprepared.

Is it mandatory in Canada?

In Canada, mortgage insurance is not mandatory, but it can cover your payments and protect your family against unexpected costs.

It differs from Canada Mortgage and Housing Corporation (CMHC) insurance, which is mandatory for homes purchased with a down payment of less than 20% and is designed to protect lenders against default.

The benefits

These days, you can buy mortgage insurance in two ways: from a bank when signing your mortgage or from an insurance company. To help you decide, here are the advantages of buying your mortgage insurance from an insurance company:

1. You own the contract and choose your beneficiaries

When you buy mortgage insurance from your bank, the bank owns the contract and is the beneficiary . In that way, the insurance you’re paying for is protecting the lender.

If you buy your mortgage insurance from an insurance company, you own the contract and can name any beneficiary you want. You can also opt for a coverage amount that takes into account other needs, like your other debts, the income needed to support your family, money for your children’s education, etc.

2. Your coverage and premium are flexible and can be adapted to your needs

If you buy mortgage insurance from an insurance company, you have the choice between two types of coverage amounts:

• The first is uniform and remains the same for the entire coverage term. In this case, your premium is also fixed and guaranteed until the renewal, conversion or expiration of your coverage.
• The second is decreasing (to 50% of the initial coverage amount). Decreasing coverage is a good option to cover your mortgage, because it reflects the decrease in your mortgage balance over time. This flexibility gives you a more affordable option for covering your loan in the event of your death.

With a bank, the amount of your mortgage coverage decreases simultaneously with your mortgage balance, while your premium remains the same.

3. You can convert your mortgage insurance

An insurance company will allow you to convert your mortgage insurance to permanent life insurance, as needed, throughout the term of your loan. No proof of insurability is required for this change and you can maintain your initial coverage amount. Your policy will then remain in force until your death.

Is it possible to avoid mortgage insurance?

When you buy a home, if your down payment is 20% or more of the purchase price, you don’t have to be insured by CMHC.

On the other hand, in an environment where interest rates may rise considerably, mortgage insurance can provide peace of mind to those who depend on you financially.

No more shopping around

By buying your mortgage insurance from an insurance company, you won’t have to shop around for mortgage insurance for the duration of the term.

If you buy from a bank and then change lenders, you will have to renegotiate your mortgage insurance, and your premium may be higher based on your age or changes in your health.

For more information on mortgage insurance, contact an advisor or try our calculator to see how affordable it can be.