Do You Need Mortgage Insurance?

By Christopher Brown | 5 minute read

The homebuying experience can be confusing if you aren’t adequately prepared. You may not be ready for every potential hiccup, however, familiarizing yourself ahead of time with all of the steps involved in buying a home can save you stress and money. 

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While mandatory in some countries and optional in others, mortgage insurance is an important part of the homebuying process and can be expensive.

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What is Mortgage Insurance?

When buying a home, most Canadians contribute a percentage of the purchase price in the form of a down payment and take out a mortgage to cover the rest. 

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Homebuyers are often confronted with the option to insure their mortgage, but it’s not as simple as tacking on an extra fee for full protection. There are three mortgage insurance products available to most Canadian homebuyers.

Types of Mortgage Insurance

In Canada, mortgage insurance can mean one of two things: mortgage default insurance or mortgage protection insurance. Mortgage default insurance is mandatory under some circumstances, although mortgage protection insurance is not. 

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Mortgage Default Insurance

A traditional mortgage requires buyers to come up with a down payment equal to 20% of the total cost of the home. You can still purchase a home without putting 20% down, however, you’ll be required to purchase CMHC Mortgage Loan Insurance. 

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Lenders pay a premium to obtain CMHC Mortgage Loan insurance, the costs of which is passed on to the homebuyer. Your CMHC insurance rate is calculated as a percentage of your purchase price and depends on your down payment amount. The larger the down payment, the smaller the premium. 

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Mortgage default insurance was designed to afford Canadians the opportunity to purchase a home with a minimum down payment of 5% on homes that cost $500,000 or less, while still protecting the lenders from a potential loan default. The mandatory product can cost an average of 2.8% to 4.0% of the mortgage depending on a range of factors.

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Mortgage Protection Insurance

Mortgage protection insurance is optional, but that’s not to say that it’s altogether unimportant. For an additional cost, mortgage protection insurance can help you pay off your outstanding balance in the event of a financial emergency. 

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Consumers can choose the type of coverage. Options include protection in the event of job loss, critical illness, death, and disability. The cost of mortgage protection insurance depends on the type of coverage, the size of your mortgage, your age, and more. The product can typically be added through your lender at any time.

How Mortgage Default Insurance Works

Let’s say you want to purchase your first home but don’t have enough cash to cover the required 20% down payment. Your potential lender can still loan you money with a little added protection.

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Mortgage default insurance doesn’t protect your interest in the property. Rather, it ensures that your lender remains protected if you can no longer come up with your monthly payments and are forced to default on the loan. The cost of this insurance is always passed on to the lender and is calculated as a percentage of the mortgage loan and based on the size of the down payment.

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How Mortgage Protection Insurance Works

Mortgage protection insurance is an optional product that’s designed to protect you and your interest in the property from a host of risks. Homebuyers can add this sort of protection to their mortgage at any time and can choose exactly what kind of coverage they’d like. The specifics can vary based on the agreement and the institution, but the fundamental principles remain relatively constant.

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If you choose mortgage life insurance protection, your policy can help pay off the outstanding balance of your mortgage if you pass away. Critical illness protection will pay off the balance of your mortgage in one lump sum should you be diagnosed with a covered critical illness. Mortgage protection insurance can also maintain your mortgage payments in the event of job loss or disability due to injury or impairment.

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Having a Savings Plan in Place

There are ways to avoid costly insurance premiums. Most financial advisors stress the importance of building and maintaining an emergency fund to offset the risk of disability, job loss, or death. Having a set amount of cash on hand to pay for unforeseen events or expenses can also help alleviate financial stress.

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The size of an emergency fund is relative to your budget and lifestyle. A savings fund large enough to cover at least three to six months’ worth of expenses is ideal. Regardless of how much you choose to set aside, take care to only use it for unexpected expenses brought on by a job loss, medical emergency, or repairs.

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Takeaways

• If you are unable to come up with a 20% down payment on a mortgage of less than $1 million, then you will be required to purchase mortgage default insurance from your lender.
• Mortgage protection insurance is optional, offers a variety of protection options, and can be added to your mortgage at any time.
• An emergency fund that’s large enough to cover three to six months’ worth of expenses can offer a level of protection that’s on par with many optional protection insurance policies.

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