Insuring your mortgage provides peace of mind
For most people, the biggest purchase they'll ever
make is a home. And chances are, much of that purchase will be financed
by a mortgage.
While people are quick to insure hard assets like
homes and cars, less attention is paid to insuring debt. But think
about it: if you lost a car and were not insured, you could probably
But if you became disabled or died, who would make
your mortgage payments? Would your estate have enough assets to
discharge the mortgage? Or, would your prized possession have to
be sold to pay off the bank? And where would your family live then?
Insuring your mortgage is "absolutely crucial,"
says Don Blair, a mortgage broker at MortgageTech Corporation, in
Newmarket, Ont. "Your single biggest purchase in life in your
house. The thought of leaving that unprotected to save a few dollars
a month in insurance payments is incredible."
Yet, people do it, he says, noting that about 50 percent
of his clients reject his recommendation to speak to an independent
There are different ways homeowners can insure their
mortgage. Most banks entice customers to sign on for mortgage insurance
when they take out a mortgage to protect the bank against loss if
the borrower defaults. The premium is based on the amount you borrow.
When mortgages must be insured - high-ratio mortgages
require lender insurance
According to the Canada Mortgage and Housing Corporation,
the federal agency responsible for affordable housing, certain mortgages
must be insured to protect the lender. These are known as high-ratio
mortgages. Mortgages with a loan-to-value ratio higher than 75 percent
must be insured. What a high-ratio mortgage does is allow buyers
with less than a 25 percent down payment to get into the housing
game by mandating the mortgage be insured through either CMHC or
GE Mortgage Insurance Canada Capital.
But high-ratio mortgages are expensive, adding thousands
of dollars to your mortgage. For example, if you only have 5 percent
to put down, you will pay 3.25% of the mortgage value as a premium
for the insurance, says Blair.
That means a buyer with $15,000 for a down payment
on a $300,000 home will tack on $9,262.50 to their $285,000 mortgage.
"It adds up in a hurry," he says.
However, that insurance only protects the lender in
the event of default. It does not protect home buyers in the event
of death or disability.
When mortgage insurance is voluntary - conventional
mortgages and creditor insurance
Cathy Honor, senior vice president and head of creditor
insurance at RBC Financial Group in Toronto, describes mortgage
insurance as "creditor insurance." Her bank offers buyers
a HomeProtector Insurance plan that protects against death and disability.
"More than half of mortgage defaults are due
to a disability," largely stemming from accidents or illness,
says Honor. The monthly premiums work out to about 12 to 17 cents
for every $1,000 of mortgage covered.
However, the way the insurance works, the buyer pays
a set fee over the life of the mortgage. So, while you might have
a $185,000 mortgage today and pay $23 a month, you will still be
paying $23 a month years from now when the amount you owe is much
However, Honor says the upside is the premium is stable
throughout the life of the mortgage, so it's easy to budget for.
It can also be canceled at any time.
"It's convenient with reasonable rates, [and]
you don't have to go through the underwriting process. Most of it
is immediate," she says. As well, it covers both spouses and
can include death and disability. "To me what mortgage insurance
is, is peace of mind.".
However, Blair says bank insurance can be expensive,
and he encourages clients to get competing quotes for term life
insurance from an insurance broker.
A term life policy may be a cheaper alternative to
pricier bank mortgage insurance
He says his experience arranging mortgages in the
Toronto area, one of the country's pricier housing markets, is that
bank insurance averages about $40 a month for a year's worth of
payments. He says homeowners can get a 10- or 20-year term life
policy that covers the mortgage and then some for the same annual
The advantage to a term policy, he says, is that if
you die during the policy, it pays your beneficiary the full amount.
So if you have a $250,000 mortgage and buy a term policy for that
amount and die five years later, your beneficiary receives $250,000,
letting him or her retire the mortgage and keep any additional funds.
A bank policy, on the other hand, only covers the
current balance owing on the mortgage
If you opt for term insurance, Blair says you want
to ensure it pays out in the event one spouse dies and that it isn't
a last-to-die policy. If it is, the cost of carrying the home in
addition to other expenses could cripple the surviving spouse.
You might also be able to leverage existing insurance
more cheaply. For example, if your employer has a group life policy,
you may be able to increase the amount of coverage to include your
mortgage for only a few dollars a month.
However, Honor, whose firm also sells life insurance,
says "we don't see it as one or the other. We believe a good
financial plan covers both."
The problem with term plans, she says, is that most
mortgages are amortized over 25 years, well beyond the length of
a 10-year term. That means the homeowner is renewing at a higher
rate in the middle of the mortgage. As well, a separate policy is
needed to cover disability and it can be expensive.
Also, if homeowners depend on their work disability
and life insurance policies, they could find themselves out in the
"The biggest fallacy is relying on group insurance
plans. They can be gone in a heartbeat," she says. All it takes
is a bankruptcy, company merger or job loss.
Jim Middlemiss is a freelance
writer and lawyer based in Toronto, Ontario. He's a frequent contributor
to National Post, Investment Executive and Wall Street and Technology.