Understanding Mortgage Insurances

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There are a number of misconceptions in the world of mortgages when it comes to the word “insurance” let’s cover the various meanings off.

 High Ratio Insurance:

Also known as CMHC, mortgage default insurance, Portfolio Insurance

In Canada, all Banks must have this insurance on any mortgage they lend on with less than 20% down payment.  It is a one-time premium paid by the borrower (normally included into the mortgage)to the insurance company that insures the lender if the borrower ever defaults on the mortgage, the lender gets all of their money back.

Three companies in Canada offer this insurance, CMHC which is owned by the Government, as well as Genworth and Canada Guaranty.  CMHC insurance is backed 100% by the Canadian Government, the other two are 95% backed by the Government.  This has been a source of discussion recently as CMHC has neared it’s legal insurable portfolio limit of $600 billion in mortgages.

If your mortgage is insured, what does that mean for you?  Very little unfortunately…the benefit is to the lender, though as long as you pay your mortgage, that insurance will never need to be used.  The one benefit to having a insured mortgage is that it is somewhat easier to transfer between lenders.

How to save money with High Ratio Insurance?

There is no easy way, other than having more of a down payment when you buy.  The premium is based on the percent down you have (LTV is the amount of the mortgage / the value of the house), see this chart from Genworth (CMHC & Canada Guaranty are the same):

You will notice a couple of things, ALT A & Vacation B just ignore, those are other programs Genworth offers.  Also, although Genworth offers insurance on mortgages with more than 20% down (LTV of less than 80%), this is generally done in the background by the lender and not charged to the client…they do this to help them sell off chunks of mortgages to other investors.  If you take a 30 year amortization instead of 25 years, they will also add .20% to your premium.

The key take away here is, that if you have 7% down, you are paying the same premium as if you had 5%…you have to get to the next tier to get a reduction, in this example, 10% down.

Mortgage Insurance:

Also known as Life Insurance, Mortgage Life Insurance

Mortgage insurance in Canada is purely optional, and poorly understood by most.  It covers Life, Disability and Critical illness coverage for the borrowers on the mortgage.  Most of us have been programmed from buying cars and other merchandise to always say no to any type of insurance.  While taking all of those types of insurance can be expensive and redundant, a well-planned insurance package capable of dealing with income loss and or death of one or all borrowers should be part of your financial plan.

Many people don’t like the idea of buying Mortgage Insurance as it is on a reducing balance, and think getting term life insurance (where the amount you agree to insure for in the beginning is what is paid out when claimed) is the better way to go…I’m not here to argue that.  There are situations where one or the other is superior, but everyone’s situation is different, and one should speak to their Financial Planner and/or their Insurance Broker for a proper review.  In this day and age of changing jobs, relying on your work coverage is poor planning.  Many think having life insurance coverage of 1 x their annual salary will be sufficient, and most disability coverage’s through work are more limited than you may know.  Please take the time to look into disability insurance and critical illness insurance…your plan should be to be able to survive one of these tragedies with as little stress as possible to you and your family.

Good article on Critical Illness here

Home Insurance:

This is the insurance that covers your home from a number of things, notably Fire & Theft.  If you live in a Condo or Townhome, your strata fee pays for your property to have Fire Insurance Coverage, you only have to cover your contents insurance for theft etc.

Your lender will most likely only require proof you have fire insurance coverage on your home, unless it is a strata property.  A few Credit Unions require Earthquake coverage in B.C.

I hope you found this helpful in understanding the various uses of the word “Insurance” in the Mortgage world!

Mortgage Expert

Guest Post Bio: Michael Anthony Lloyd is a Mortgage Expert with DLC Canadian Mortgage Experts and has helped Canadians with their mortgages as a Mortgage Broker since 1999.  Helping Canadians reach their “Mortgage Freedom Day” sooner is his goal.  He writes a Blog called The Daily Dig as well as leading the DLC CME team of 75 brokers.

Photo Credit:MJL

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  1. This is a great post. When we bought our first house, we didn’t get mortgage insurance because we didn’t have a high mortgage, and we had enough life insurance to cover the mortgage. I just learned about the whole disability thing with mortgage insurance and it was a lifesaver for my cousin. He is permanently disabled after his second biking accident, so thank goodness he had mortgage insurance.

    1. We went with the term life insurance as well as we didn’t see the benefit of the mortgage insurance. Soon we will have our mortgage paid and we will still have the life insurance but are also looking into critical illness insurance as well. So much to think about. Thanks for your comment! Mr.CBB

  2. I’m still not sure what I should do about my insurance…I have term insurance with Primerica, I have mortgage insurance with my bank and I have life and disability through work. Is that too much? I was going to cancel my mortgage insurance since I have term life insurance but then someone said I should keep it. I’m just not sure what to do 🙂

    1. Hi Jen,
      We don’t have mortgage insurance as it seemed like a waste of money to us. We opted to get term insurance for way more than what mortgage insurance would have gave us. As Mike mentions if you popped your clogs Ken mortgage insurance (if all works out well) will only cover the remainder of your mortgage. With term life you get what you are paying for. So if your policy is for 400K you get 400k. So you could be paying I’m guessing $35 a month for mortgage insurance on a $300k house with a mortgage of $100k left which would only get paid out. You could pay $35 for 400k in term life which would get paid out. I hope that makes sense. This is how I understand it. I would certainly call someone to make an informed decision. I never rely on work insurance alone. The younger you are getting term life the better and potentially cheaper if you are in good health. If you lost your job tomorrow wave bye bye to your insurance then you have to get your own. Again, I’d talk to a professional. Maybe Mike can add or correct something I’ve said here. Cheers Mr.CBB

      1. Great Post!

        I just came across this.
        In a nutshell here is what insurance should do.

        Pay off debt (mortgage, LOC,etc.)
        Replace income
        Fund Kids education (assuming RESP contributions stop at death)
        Replace retirement income (an example is a teacher or police officer who has a pension)

        Often people will say 10 x income but this may not be enough.

        $100,000 salary (assuming a 2% increase every year) and the money can be invested safely @ 5% One million dollars (life insurance) will last 12 years!

        This does not factor other unknowns like replacing cars, home repairs, kids education, etc.

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