Mortgage Insurance

A mortgage is a very big financial commitment which can last for the most of a working lifetime. In almost every case a mortgage will be the largest loan that a homeowner will ever take out. For this reason many parties involved with mortgages want some form of protection, whether it is the borrower, the borrower’s family or the lender.

Home Mortgage Insurance - Protecting the Lender

Mortgage insurance is designed to help people who want to buy a home, but who do not have a large deposit. A large deposit gives a lender a certain amount of reassurance as if the borrower falls in default then the lender can repossess the home and the sales proceeds, even if the house is sold quickly, are almost always going to cover the amount of money loaned.

For those who do not have a large deposit, either because they’ve never owned a home before or because they do not have a high income, often find that lenders are reluctant to lend. With a small deposit the lender is far more likely to lose money on the loan advanced on the home.

Mortgage insurance is designed to help those borrowers with a small deposit by protecting the lenders. If the borrower defaults then the mortgage insurance will pay off the lender for the value of the loan, even though the mortgage insurance premium is paid for by the borrower. Since the introduction of mortgage insurance, this has meant that lenders have become more willing to lend to those with small deposits.

Every homebuyer who has a deposit of less than 20% is required to have mortgage insurance. In some cases where the lender thinks that there is a high risk of a house losing its value, for example where the house has only recently been built, then a lender may insist on mortgage insurance as a condition of the loan even if the deposit is more than 20%.

Most mortgage insurance is offered by the Canada Mortgage and Housing Corporation (CMHC) which is a crown corporation owned by the Federal Government. They have a 65% share of the Canadian mortgage insurance market, with their biggest competitor being Genworth Financial, a subsidiary of General Electric. Choosing a private insurer may lower the mortgage insurance rates that are being charged, and using a mortgage insurance calculator may be worthwhile.

Mortgage Protection Insurance - Protecting the borrower

Mortgage Protection Insurance is designed to cover mortgage payments for a certain period of low income, often a period of as much of a year. Essentially mortgage protection insurance is an income protection policy where the policy holder pays a premium and then gets money paid back if the income is lost through disability or unemployment.

The mortgage is only paid for a certain period and so Mortgage Protection Insurance is not suitable for covering dependents in the event of the death of the main income earner. Mortgage Protection Insurance will also not pay out if a lower paid job is accepted. This has led to the criticism that it discourages people with a large mortgage from accepting lower paid work as the renewed mortgage payment will drastically lower their disposable income, sometimes to levels below what they get from being unemployed.

Mortgage Life Insurance - Protecting the dependents

Mortgage Life Insurance is a form of life insurance, although it is tailored to match a specific mortgage. Unlike normal life insurance, where an agreed sum of money is paid to the dependents of a policy holder if the dependent dies, mortgage life insurance means that the balance of the mortgage is paid off to the mortgage lender on the event of the borrower’s death. The dependents are protected as the house is now owned debt free by the dependents.

As Mortgage Life insurance only covers the balance of the mortgage then the value of the pay out will gradually decrease over time, although the premiums are the same throughout the life of the loan. Defaults, penalties and deferred interest are rarely covered in the payout. This is compounded by the fact that the borrower is far less likely to die when they are younger at the beginning of the loan than when they are older at the end of the loan, and that inflation can cut the value of a later pay off.