Mortgage Insurance: Because a House is an Asset to be Protected

Do you have mortgage insurance? This seemingly simple question hides an unsuspected complexity. Why? Because in Canada, what is commonly referred to as "mortgage insurance" refers to two very different products. These two types of protection offer distinct coverages that require a little clarification.

Mortgage default insurance and mortgage protection insurance, despite their similar names, do not apply to the same issues. They insure against default on payments and unforeseen situations following a death, accident or loss of employment, respectively. 

Mortgage loan insurance

This first type of protection is mandatory for people who make a down payment of less than 20% of the value of the property purchased. The premium for this insurance is based on the purchase price and depends on the financial situation of the insured. It generally varies between 2.5% and 4% of the total amount of the mortgage.

Mortgage loan insurance also allows Canadians to buy their first home sooner by lowering the minimum down payment required to 5%. It is designed to reduce the risk associated with borrowing and gives buyers access to better rates that they may not otherwise qualify for. 

However, mortgage loan insurance has its drawbacks: the premium is added to the mortgage amount, which ultimately reduces the value of the property. Also, in Ontario and Quebec, the provincial sales tax that applies to the insurance premium cannot be added to the loan and must therefore be paid at the time of signing the agreement. 

Mortgage Protection Insurance

This second type of insurance is optional, but remains an interesting product that can contribute to greater peace of mind. Unlike default insurance, this second type of insurance can be taken out at any time during the repayment of a mortgage.

Coverage can range from life or critical illness insurance to disability or job loss insurance. Its premium is calculated according to the remaining amount of the loan. It provides for the partial or full repayment of a mortgage in the event of death, or the payment of certain installments in the event of work stoppage or accident. 

Although it is not mandatory, this protection should be considered for couples whose loan repayment depends on the contribution of both buyers. This insurance covers the mortgage loan for the duration of the chosen protection and its premium decreases with the repayment of the loan. In this sense, it differs from personal life insurance because its protection only affects the owners of the home and its action does not extend beyond the term of the loan. So they are two different insurance products. 

Is this clearer now? Mortgage loan insurance and mortgage protection insurance are still good protections that give buyers flexibility, which is why they should be considered. 

After all, buying a home is the largest loan most Canadians will take out in their lifetime. After all, being a homeowner already comes with its share of unforeseen events, so why not give yourself some extra peace of mind to avoid curve balls?

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This blog was written, designed and produced by Pierre Dauth, Investment Funds Advisor with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this blog comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities.  Mutual Funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments.  Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.