Understanding Mortgage Insurances

There are a number of misconceptions in the world of mortgages when it comes to the word “insurance” let’s cover the various meanings off.

 High Ratio Insurance:

Also known as CMHC, mortgage default insurance, Portfolio Insurance

In Canada, all Banks must have this insurance on any mortgage they lend on with less than 20% down payment.  It is a one-time premium paid by the borrower (normally included into the mortgage)to the insurance company that insures the lender if the borrower ever defaults on the mortgage, the lender gets all of their money back.

Three companies in Canada offer this insurance, CMHC which is owned by the Government, as well as Genworth and Canada Guaranty.  CMHC insurance is backed 100% by the Canadian Government, the other two are 95% backed by the Government.  This has been a source of discussion recently as CMHC has neared it’s legal insurable portfolio limit of $600 billion in mortgages.

If your mortgage is insured, what does that mean for you?  Very little unfortunately…the benefit is to the lender, though as long as you pay your mortgage, that insurance will never need to be used.  The one benefit to having a insured mortgage is that it is somewhat easier to transfer between lenders.

How to save money with High Ratio Insurance?

There is no easy way, other than having more of a down payment when you buy.  The premium is based on the percent down you have (LTV is the amount of the mortgage / the value of the house), see this chart from Genworth (CMHC & Canada Guaranty are the same):

You will notice a couple of things, ALT A & Vacation B just ignore, those are other programs Genworth offers.  Also, although Genworth offers insurance on mortgages with more than 20% down (LTV of less than 80%), this is generally done in the background by the lender and not charged to the client…they do this to help them sell off chunks of mortgages to other investors.  If you take a 30 year amortization instead of 25 years, they will also add .20% to your premium.

The key take away here is, that if you have 7% down, you are paying the same premium as if you had 5%…you have to get to the next tier to get a reduction, in this example, 10% down.

Mortgage Insurance:

Also known as Life Insurance, Mortgage Life Insurance

Mortgage insurance in Canada is purely optional, and poorly understood by most.  It covers Life, Disability and Critical illness coverage for the borrowers on the mortgage.  Most of us have been programmed from buying cars and other merchandise to always say no to any type of insurance.  While taking all of those types of insurance can be expensive and redundant, a well-planned insurance package capable of dealing with income loss and or death of one or all borrowers should be part of your financial plan.

Many people don’t like the idea of buying Mortgage Insurance as it is on a reducing balance, and think getting term life insurance (where the amount you agree to insure for in the beginning is what is paid out when claimed) is the better way to go…I’m not here to argue that.  There are situations where one or the other is superior, but everyone’s situation is different, and one should speak to their Financial Planner and/or their Insurance Broker for a proper review.  In this day and age of changing jobs, relying on your work coverage is poor planning.  Many think having life insurance coverage of 1 x their annual salary will be sufficient, and most disability coverage’s through work are more limited than you may know.  Please take the time to look into disability insurance and critical illness insurance…your plan should be to be able to survive one of these tragedies with as little stress as possible to you and your family.

Good article on Critical Illness here

Home Insurance:

This is the insurance that covers your home from a number of things, notably Fire & Theft.  If you live in a Condo or Townhome, your strata fee pays for your property to have Fire Insurance Coverage, you only have to cover your contents insurance for theft etc.

Your lender will most likely only require proof you have fire insurance coverage on your home, unless it is a strata property.  A few Credit Unions require Earthquake coverage in B.C.

I hope you found this helpful in understanding the various uses of the word “Insurance” in the Mortgage world!

Guest Post Bio: Michael Anthony Lloyd is a Mortgage Expert with DLC Canadian Mortgage Experts and has helped Canadians with their mortgages as a Mortgage Broker since 1999.  Helping Canadians reach their “Mortgage Freedom Day” sooner is his goal.  He writes a Blog called The Daily Dig as well as leading the DLC CME team of 75 brokers.

Photo Credit:MJL

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