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Mortgage Insurance in Canada

Mortgage Insurance is frequently sold to prospective homeowners in Canada. People who are looking for options in case that an untimely death or illness may leave their loved ones with a huge mortgage.

Personal life insurance similarly helps you, but it isn’t limited to only covering your mortgage. Its purpose is to distribute money to your beneficiaries in the case of your death. Mortgage insurance, however, helps protect your investment and ensures your property remains yours.

What is Mortgage Insurance in Canada?

Mortgage life insurance is coverage that you can obtain as a mortgage borrower. It’s meant to pay off or minimize your mortgage if you pass away. The insurance proceeds are always applied to the outstanding balance on the mortgage. This can help your family stay in their house even if the principal source of income that was previously utilized to pay the mortgage is no longer available.

One of the advantages of including mortgage life insurance in your overall financial plans is it can free up funds from other insurance policies. For example, money received through employer-provided insurance or a personal life insurance policy could be used for expenses other than the mortgage, such as utility payments or children’s university tuition.

How Does Mortgage Insurance Work?

The mortgage insurance protects the mortgage lender from a loss if the borrower defaults. Mortgage insurance is frequently confused with mortgage life insurance, although the two policies are different. In case of the borrower’s death, mortgage life insurance covers out the loan. Mortgage life insurance can be obtained at the bank during the mortgage application process. It may be less difficult to qualify for coverage than personal life insurance. The application process for mortgage life insurance is equally simple.

Mortgage life insurance is group insurance, resulting in reduced premiums because the risk is spread out over a big group of people.

Mortgage insurance is most commonly found in mortgages with lower down payments, and it is normally a requirement in Canada for mortgages with down payments of less than 20%. The function of mortgage insurance in Canada is dependent on the type of policy you select. 

Mortgage Loan Insurance vs Mortgage Protection Insurance

Mortgage insurance is divided into mortgage default insurance and mortgage protection insurance. Other types of insurance, such as life, critical illness, and disability insurance, might be beneficial when you have a mortgage. Some mortgage insurance policies are necessary, while others are optional.

Mortgage Default Insurance

Mortgage default insurance (also known as mortgage loan insurance) protects your lender, rather than you in the event that you default on your mortgage. It’s required if your down payment is less than 20% of the home’s purchase price, which is referred to as a high-ratio loan.

Mortgage default insurance provides the benefit of allowing you to purchase a property even if you only have 20% of the purchase price saved for a down payment. For Canadians, this makes the housing market more accessible.

Mortgage default insurance is not available to all borrowers. To be eligible for this insurance, you must meet the following requirements:

  • Credit score above 680
  • A gross debt service lesser than 35% and a TDS ratio lesser than 42%
  • A property in Canada that costs less than one million dollars
  • A mortgage loan with an amortization period of 25 years or less
  • Down Payments cannot be borrowed funds

Mortgage Protection Insurance

While mortgage default insurance protects the lender if you default on your mortgage, mortgage protection insurance pays for your remaining mortgage balance in the event of your death.

The payout plans for mortgage protection insurance, typically sold to borrowers by their mortgage lender, are dropping. This means that you may initially pay premiums for a benefit that covers your full mortgage. Still, your benefit decreases as you pay down your mortgage, even if you continue to pay the same monthly premium.

Other insurance products, such as life insurance, critical health insurance, and disability insurance, are usually better solutions because this sort of insurance covers only your mortgage and nothing else. It is paid directly to your lender without your family seeing a dollar.

These plans are more adaptable, and they can offer funds for you and your beneficiaries in addition to the mortgage payment. Your premiums may be less expensive than mortgage protection insurance depending on your health, age, and other factors.

How Much Does Mortgage Insurance Cost?

As with other insurance plans, a premium must be paid, which is charged to the lender, who then passes the expense of the premium on to the borrower. The premium is calculated as a percentage of the loan amount and the size of the down payment, with a smaller down payment resulting in a greater premium.

The premium can be rolled into the mortgage as part of the monthly payment or paid in advance. Depending on the size of the down payment, the exact percentage varies.

Pros and Cons of Mortgage Insurance

Mortgage insurance is a widely debated aspect of the mortgage market. Many borrowers and first-time homeowners wonder whether the investment is truly worth it, while others strongly stand by the reassurance of an insurance policy. Here are some pros and cons for you to see the disadvantages and benefits of mortgage insurance.

Pros

The existence of mortgage insurance allows the borrower to acquire a home with a lower down payment than is generally required. The possibility to buy a home with a lesser down payment has opened up the housing market to tens of thousands of people who would not otherwise be eligible for a loan.

Outside of the down payment, mortgage insurance in Canada offers various benefits, such as:

  • Helps you buy a home sooner.
  • Adds stability to your situation and ensures you can repay the mortgage irrespective of your situation.
  • Lowers the general mortgage risk.
  • Ensures borrowers get competitive and reasonably low mortgage insurance rates.

Cons

Some of the biggest cons to mortgage insurance in Canada are:

  • High premium costs.
  • You need to pay the interest alongside the mortgage insurance.
  • Mortgage insurance reduces your home equity and/or the degree of your ownership of the property.
  • Like Quebec, Ontario, Saskatchewan, and Manitoba, certain provinces consider mortgage insurance taxable.
  • Mortgage insurance increases as the proportion of the down payment fall, adding to the overall cost of the loan.
  • An average premium for a mortgage with a 35% down payment may be as low as.5%, but it could be as high as 2.75 percent for a mortgage with a 5% down payment.
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