People don’t always want to talk about home insurance, but when it comes to your house there is no better investment than insurance. With the number of insurance products available, it can be hard to know where to start! While it can seem overwhelming, it’s a good idea to get familiar with the basics of some of the required and optional insurance coverage.

Default Insurance

The first and perhaps most common form of insurance when discussing the mortgage space is known as “default insurance.” The purpose of mortgage default insurance is to protect the lenders, allowing them to lend money more aggressively.

This type of insurance is mandatory for homes where the buyer puts less than 20 percent down on the purchase. In fact, default insurance is why lenders accept lower down payments, e.g., 5 percent down. Default insurance helps many buyers access comparable interest rates typically offered with larger down payments.

In Canada, only three companies offer default insurance: Canada Mortgage and Housing Corporation (CMHC), which is run by the federal government and two private companies: Sagen and Canada Guaranty.

Default insurance typically requires a premium, which is based on the loan-to-value ratio (mortgage loan amount divided by the purchase price). This premium can be paid in a single lump sum or more commonly, can be added to your mortgage and included in your monthly payments.

According to CMHC, the minimum down payment required for mortgage loan insurance depends on the purchase price of the home:

  • For a purchase price of $500,000 or less, the minimum down payment is 5 percent.
  • When the purchase price is above $500,000, the minimum down payment is 5 percent for the first $500,000 and 10 percent for the remaining portion (up to $999,999).

It is also important to note that default insurance (or mortgage loan insurance) is available only for properties with a purchase price or an improved/renovated value below $1 million.

Title Insurance

Another insurance policy that potential homeowners may encounter is known as “title insurance.” This insurance policy protects residential or commercial property owners and their lenders against losses relating to the property’s title or ownership. In fact, it is so important to lenders that every single lender in Canada requires you to purchase title insurance on their behalf. It is not a requirement to have coverage for yourself, but that doesn’t mean you should dismiss it outright.

Title insurance can protect you from existing liens on the property’s title, but the most common benefit is protection against title fraud. Title fraud typically involves someone using stolen personal information or forged documents to transfer your home’s title to him or herself – without your knowledge. The fraudster then gets a mortgage on your home and disappears with the money. As the old adage goes: “It’s better to be safe than sorry” — and the same goes for insurance.

Similar to default insurance, title insurance is charged as a one-time fee or a premium with the cost based on the value of your property. Title insurance for the lender is typically $250 to $300, while title insurance for yourself runs around $125 to $150. You can purchase title insurance through your lawyer or title insurance company, such as First Canadian Title (FCT).

Learn more about Title Insurance here

Mortgage Protection Insurance (also known as Creditor Insurance)

Despite being optional, Mortgage Protection Insurance should still be considered. Almost every mortgage broker in the business has a story of someone who passed on the extra coverage right before tragedy hit.

Life happens, but it doesn’t have to happen to your home. While you may not want to spend the money now, or you might already have some type of life insurance policy through work, don’t discount this option – especially if you have a spouse and children. If your family would not be able to pay the mortgage without you, they would be forced to sell on top of everything else. For a few extra dollars a month, mortgage protection insurance provides that safety net in the event it is ever needed.

There are many different policies available depending on your budget. Mortgage Protection offers immediate insurance and can be cancelled at any given time. If you think you may be covered through your work, it can’t hurt to take a closer look at the policy. 

Learn more about Manulife’s Mortgage Protection Plan here

Mortgage insurance is considered debt replacement, whereas life insurance serves the purpose of income replacement. This is an important distinction and you should understand the difference. You also need to see just how much you’re going to get through your life insurance policy; you may be surprised just how little it amounts to.

Life Insurance

While mortgage protection insurance and life insurance essentially serve the same purpose, it’s worth considering these key differences:

  • Ease

When signing your mortgage loan papers, it’s often possible to sign your mortgage protection insurance during this time. The premiums are simply added to your mortgage or loan payments.

Life insurance is a lengthier and more involved process, and the payments are made directly to your insurance company instead of your bank.

  • Eligibility

Answering a few basic health questions is all it takes for the majority of customers to be automatically approved for coverage. Mortgage protection insurance policies use post-claim underwriting, meaning the insurance company will scrutinize your medical history after a claim is made. Your claim could be denied if your insurance company finds a pre-existing health condition, regardless of whether you and your doctor(s) were aware of the condition when you signed. In other words, you may not be covered even after paying your premiums.

Qualifying for life insurance may require a blood or urine sample, and the insurance company has the right to contact your doctor. If your loved ones need to make a claim, they should receive full benefits with no further investigation required.

  • Beneficiaries

Mortgage protection insurance ultimately protects your lender. In the case of sudden death, your lender receives your policy’s benefits – not your family.

Life insurance allows you to decide on the beneficiaries of your insurance coverage.

  • Flexibility

Mortgage protection insurance is inflexible. Benefits from the claim are used to pay off your debt with the lender.

Life insurance offers your beneficiaries the freedom to choose how the payout is used. For example, if your loans are significantly reduced over the years, the benefits may be used to pay off high-interest loans, e.g., student debt.

  • Value of coverage

With mortgage protection insurance, the value of your insurance coverage is relative to the amount remaining on your mortgage loan. Paying off your debt will result in reduced coverage.

The value of your life insurance remains the same throughout the term of your policy.

  • Cost

Premiums on mortgage protection insurance are typically higher than on term life insurance, but this largely depends on your age and overall health – and your quoted premium may only be valid for one year.

Your life insurance premiums remain consistent for the duration of your term, e.g., Term 10 to 20 years.

The bottom line? If you don’t qualify for life insurance, mortgage protection insurance may be right for you. If you already have life insurance, increasing your coverage to include your mortgage or loan payment may be the most cost-effective option.

Property + Fire Home Insurance

Lastly, after you’ve signed off on your mortgage, you need to close on the home. Before you do this, your lender is going to require home insurance. When it comes to home insurance, there are many different types of coverage; however, it generally protects you from damage to the home that is accidental or unexpected, such as a fire.

Home insurance can also cover the contents of your home, depending on your insurance package. For individuals looking at purchasing a condo or townhouse, this is especially important! The insurance from strata typically protects the building itself and common areas, as well as your unit “as is”, but it will not account for your personal belongings or any upgrades you made. Be sure to cross-check your strata insurance policy and take out an individual one on your unit to cover the difference.

One final thing to consider with regards to home insurance is that, just because you have home insurance, you’re not necessarily covered in the event of a flood or earthquake. Depending on where you live, you may need to purchase additional coverage to be protected from a natural disaster. It’s best to talk to your insurance provider to confirm that you are covered; alternatively, I can recommend an Insurance Advisor.

At the end of the day, purchasing a home is a huge investment. Why risk it when there are so many great insurance products to ensure your investment – and family – remain protected? Get in touch and I can help you find out what coverage is needed and how to go about getting it!

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