You have chosen the home you like and are ready to apply for a mortgage loan. Then your advisor brings up something called mortgage insurance. You may ask yourself what this type of insurance is and if you have to get it. It is good to know about mortgage insurance in the home-buying process.
The type of insurance you choose can affect your mortgage payments and how much you pay in total. This guide will help you learn what you need to know about mortgage insurance, the type of insurance, and mortgage payments. With this information, you can feel good as you move forward with your next steps.
Here are the main things you need to know about mortgage insurance:
In Canada, the words mortgage insurance can mean two things. It could be mortgage default insurance or mortgage protection insurance. If your down payment is under 20% of the purchase price of the home, you must get mortgage default insurance. People also call this mortgage loan insurance.
This type of insurance helps protect the mortgage lender or the financial institution. It is not there to protect you. If you do not make your mortgage payments, this insurance acts like a safety net for the lender. Now, let’s talk about why this insurance is needed and why many people who get a mortgage loan must have it.
So, what is mortgage insurance and why do people who buy homes need this? Mortgage insurance is a type of insurance that helps your mortgage lender. If you do not pay your mortgage payments, this insurance can support the lender. If you stop making payments and your mortgage lender takes your home, mortgage insurance will pay the lender for what they lose.
This is what helps lenders feel better when they give a mortgage loan to people with a small down payment. If your down payment is not big, most lenders think it is more risky for them. Mortgage loan insurance can fix this, as it lets the lender feel safe to offer you money. It covers the risk, so you can get your home even if you do not have a 20% down payment.
Mortgage protection insurance is here to help you. But most of the time, mortgage insurance is set up to protect the lender, not you. The cost of mortgage insurance makes you pay a bit more. This extra cost can help you get into a house faster.
The main reason people get mortgage insurance is to help them get a mortgage loan when they do not have much money for the down payment. With mortgage insurance, you do not need to wait years to save up 20% of the home's purchase price. This insurance also makes it less risky for the financial institution giving you the money for your home.
When you give a small down payment, the lender has more risk. Mortgage insurance helps the lender feel safe, so they can approve your mortgage loan. This lets more people get a home, even if they do not have much saved. It is good for first-time homebuyers who may not have big savings.
Here are some reasons why you might need mortgage insurance:
When you get a mortgage loan and you put down less than 20%, your mortgage lender will arrange mortgage loan insurance for you. The cost for this insurance is called the mortgage insurance premium. It will be added to your loan amount. You pay this as part of your monthly mortgage payment.
For some loans, you may need to pay an upfront fee when you close. This fee is a kind of insurance. It helps protect the lender. If you do not pay your mortgage and the lender needs to sell your new home, this insurance will help cover what the lender does not get back. In the sections below, you will find out when this insurance is needed and who has to pay for it.
In Canada, you must have mortgage loan insurance for certain types of home loans. The mortgage lender asks for it if you put down less than 20% of the purchase price of the home. The financial institution sees these mortgage loans as high risk because the down payment is small.
This type of insurance is different from homeowners insurance. Homeowners insurance covers your home and the things you own inside it. Mortgage insurance is there to protect the lender if the borrower defaults on the mortgage loan. If your home costs $1 million or more, you need to put down at least 20%. In that case, mortgage loan insurance will not apply.
Lenders ask for mortgage insurance when:
The homebuyer pays for mortgage insurance. This is done to protect the lender, but the cost goes to you. The mortgage insurance premium is added to your mortgage loan amount. It then becomes part of your monthly mortgage payment. You pay it over the life of the loan.
The cost of mortgage insurance comes from a percentage of the loan amount. The rate changes based on your loan-to-value ratio. This ratio looks at the mortgage amount and how it compares to the home's value. A smaller down payment makes the LTV ratio higher. A high LTV ratio means you will pay more for the mortgage insurance premium.
Several factors influence the final cost:
In Canada, there are two main types of mortgage insurance. The first type is mortgage default insurance. People often call it mortgage loan insurance or standard mortgage insurance. You must get this kind of insurance if you have a high-ratio mortgage. This type of insurance is made for your lender. It keeps the lender safe.
The second kind is optional mortgage protection insurance. You do not need to have this, but you can pick it if you want to keep you and your family safe. This type of insurance can help you with your mortgage payments. It can also help pay your outstanding balance if you die, get sick, or lose your job. Now, we will talk about the kinds of mortgage insurance and what makes each type of mortgage insurance different.
In Canada, standard mortgage insurance is needed if your down payment is under 20% when you take a mortgage loan. Three companies in Canada offer mortgage insurance. These are CMHC, Sagen, and Canada Guaranty. The reason for this insurance is to keep the lender safe if you do not pay back your mortgage loan.
You may have heard the words "private mortgage insurance" or PMI. This is mainly used in the United States for their usual home loans. In Canada, the words "mortgage insurance" mean the insurance you get from private companies like Sagen and Canada Guaranty. The Canada Mortgage and Housing Corporation (CMHC) also gives this type, but it is public.
There is another type you can get. This is called "optional mortgage protection insurance." You buy this private insurance for your own peace of mind.
The keywords are: mortgage insurance, private mortgage insurance, and mortgage protection insurance.
Here’s a quick comparison:
Mortgage protection insurance is a choice you can make. The main thing it does is help you, the homeowner. It is not like the normal mortgage insurance, which is there for the mortgage lender. This type of insurance helps you with your mortgage payments if you run into hard times. It works like a safety net to protect what could be your main asset. For people who own a business, things like business succession insurance Canada and partnership life insurance Canada can be important, too.
This kind of insurance is called mortgage life insurance. There are a few types you can choose from. You can get coverage for death, a serious illness, disability, or even if you lose your job suddenly. If any of these happen to you, this type of insurance can pay off your outstanding balance on the mortgage. It can also cover your monthly mortgage payments for some time.
There is a big difference between mortgage protection insurance and the mortgage insurance your lender requires. Mortgage protection insurance can give money to you or your loved ones. It can also pay the lender for you. This way, your family can keep the home if something happens. But basic mortgage insurance only helps the lender if you do not pay the amount of your mortgage. You would still have to move out of the home.
The cost of mortgage insurance is not the same for everyone. It depends on your age, the amount of your mortgage, and how much coverage you pick.
Once you get mortgage insurance, you might wonder if you have to keep it for the entire loan time. The good thing is the types of mortgage insurance can change or get removed later. This could help you lower your mortgage payments. What type of mortgage insurance you get and how much of the loan you have paid will decide if you can do this and when you can do it.
It is good to check and compare what ways you have to keep your mortgage insurance safe. A normal life insurance plan may give you more to choose from than the mortgage protection insurance you get from your lender. In this guide, we will talk about how to cancel mortgage insurance. Also, we will go over what types of mortgage insurance there are and other choices you have.
In Canada, if you want to cancel mortgage insurance, the rules depend on the type of insurance you have. For mortgage loan insurance, you need it when your down payment is less than 20%. The premium is added to your mortgage loan amount right at the start. This makes it part of your mortgage loan. You cannot cancel or take out mortgage insurance later. You keep making your regular mortgage payments until you finish paying off the whole loan, including the cost of insurance. The cost stays for the life of the loan.
This is not like what you see in the U.S. In the U.S., there is what they call private mortgage insurance or PMI. You can often stop paying PMI when you have 20% equity in your home. In Canada, people pay a mortgage insurance premium only one time at the start. The payment is based on your mortgage amount.
If you have mortgage protection insurance, and it is something you chose, things do not be the same as if you had to get it.
If you want to keep your family safe from your mortgage loan debt, you have a few options. You can get mortgage protection insurance from your lender. Or you can go for a personal life insurance plan like term life insurance. Both can help pay off the mortgage loan’s outstanding balance if anything happens to you. But the two cover these costs in different ways.
Mortgage life insurance is tied to your mortgage loan. If you pass away, the lender gets paid, not your family. The payout drops as you pay off the loan amount. But with personal life insurance, the money goes to people you pick. They get a set amount, and it is tax-free. Your loved ones can use this money to pay the mortgage, other debts, or for daily needs. This means your family will have more choices. You can talk to a life insurance broker near me to learn about family life insurance Canada and find the right plan.
Here's how they are different:
To sum up, it is good to know about mortgage insurance if you want to buy a home in Canada. Mortgage insurance helps to protect lenders in case someone does not pay back their loan. It also lets you buy the home with a smaller down payment. When you learn about the types, prices, and steps for mortgage insurance, you can make better choices for your money plans. If you feel ready to move forward to buy a home, you can get a free talk to learn what mortgage insurance options are there and find the plan that works well for you.
Cindy David, CFP, CLU, FEA, TEP, is President & Estate Planning Advisor at Cindy David Financial Group Ltd. in Vancouver. A recognized leader in wealth management and estate planning, Cindy guides clients with strategic, tax-effective solutions while championing innovation and women’s leadership in the financial industry. She is the former Chair of the Conference for Advanced Life Underwriting (CALU) — Canada’s professional association for senior life insurance and financial advisors that advances education, advocacy, and best practices in advanced planning and public policy.
