Don’t Buy Mortgage Insurance from your Lender: Understanding better mortgage protection

When you buy a house in Quebec, your mortgage provider or lender will definitely require you to have mortgage insurance.

There are different insurance requirements for home buyers, depending on the amount of their down-payment and the home purchase price.

Insurance requirements can be a little confusing to new buyers. In order to ensure that you get mortgage insurance that is relevant and affordable, read on and know your best options.

What kind of mortgage insurance do you need?

To determine what mortgage insurance you need, you must know the following:

1. home selling price
2. amount of your down-payment

For a home that is less than $1 Million in price and with a down-payment of less than 20%, homeowners will be required to have mortgage default insurance. This is also referred to as CMHC insurance.

Mortgage default insurance is designed to protect lenders in case the borrower stops paying or defaults on the mortgage loan.

A CMHC mortgage insurance costs a homebuyer an additional 2.8% to 4% of their mortgage amount. However, it allows homeowners to afford buying a house even with a smaller down-payment.  Without such an insurance, mortgage interest rates would be significantly higher because lenders would be exposed to higher risks.

3 Important Considerations for Mortgage Default (CMHC) Insurance

• The maximum term for this type of insurance is 25 years
• This insurance protects the lender. In case of default, the insurance policy is paid to the lender.
• This insurance is not possible for homes with a selling price of $1 Million and above because a minimum 20% down-payment is required.

What mortgage insurance do you need if you have a 20% Down-payment?

Not all home buyers are required to obtain mortgage default insurance.

For home buyers that pay at least 20% down-payment, they have the option to purchase mortgage insurance or mortgage life insurance.

This type of insurance is available directly from your lender (they will try their best to sell you their own mortgage insurance if the lender is a bank) or you can buy your policy from insurance brokers.

Is a mortgage insurance from a lender the same as insurance from a broker? This is a very important question, and the answer is NO.

Mortgage insurance products from your lender bank and insurance brokers would be dramatically different in certain aspects outlined below.

Don’t be Vulnerable Because of a Mortgage Debt: Choose your insurance wisely

When you are buying your first house and thinking of the huge debt you are taking on, you can feel the financial responsibility. You want to make sure the mortgage is paid so your loved ones will always have a roof over their heads if something bad happens to you. So when your mortgage lender asks if you want insurance, you are quick to say yes.

Your lender can easily provide you with the insurance you need because banks offer their own insurance products.  The cost of the insurance is then added to your payments. Fast and easy, right? Actually, it is not that simple.

Lenders don’t have a hard time selling insurance to their clients because you are at your most vulnerable when getting a mortgage loan. However, a bank’s insurance product is designed to protect the bank, not you.

It is important to shop around and compare mortgage insurance costs before you sign-up with your lender.  There are many insurers and insurance brokers in Quebec that can give you affordable rates with life insurance products that can take care of your mortgage.

Your lender will require insurance to cover the loan but cannot require you to buy the insurance from them.

Check below for the features and level of protection between mortgage life insurance from lenders and term-life insurance from insurance brokers.

Mortgage Life Insurance From Lenders

Banks offer mortgage life insurance or term-life insurance. This type of insurance product has decreasing coverage over time to be in line with your decreasing mortgage debt.  Does this sound good to you? Before you decide, take note of these important facts:

• Coverage: Decreases over time
• Premiums: Stay level or the same
• Benefits: Paid to the lender

Considering that your premium payments stay the same despite decreasing amount of coverage, this insurance product only benefits your lender.

Further, the term is for how long your rates are valid and not for the term of your mortgage.  Every time you renew your insurance, you can be given higher rates based on your health status or other factors.

Term-Life Insurance from Insurance Brokers

Term-life insurance is offered by insurance brokers to cover a mortgage.

You can name your beneficiaries, including your lender, so that the policy covers the amount of your mortgage.

Other important features are:

• Cost: Lower than lender-provided mortgage life insurance
• Rate: Guaranteed for the entire term of the policy
• Benefits: Paid to your beneficiaries
• Coverage: Remains the same throughout the term

It is important to note that with term-life insurance, your insurability is guaranteed once the policy is issued.  It cannot be revoked while the policy is in force as long as you regularly pay your premiums.

Your lender will require you to have mortgage insurance in place but they can’t force you to buy the insurance from the bank.  Thus, it is to your best advantage to know your options and compare them to find the right insurance that benefits you the most.

Considering these facts, you can get better value from your mortgage insurance with term-life insurance from insurance brokers.  You can get term-life for 20 years, 25 years, or 30 years at more affordable prices.

Understanding How Insurance Can Protect You and Your Mortgage

The main reason, and the most important reason, that a person buys life insurance is to insure the value of the person’s income.

A person that has financial obligations such as a mortgage can ensure that if he should die, the mortgage will be paid off.

But bear in mind that you don’t just need your mortgage paid. If you die, your dependents would need to have your income replaced so they can continue living the lifestyle that you have granted them.

A mortgage is traditionally about 1/3 of a person’s income.  This means that you must still consider insuring 2/3 of your income to provide for your dependents.

For this reason, mortgage life insurance provided by lenders is not for your own protection.  Rather, it protects your lender in case you are unable to pay back the mortgage. While it does free your loved ones from the burden of paying back a mortgage, it won’t take care of their other needs as all the money goes to the bank.

Below are other ways that mortgage life from a lender and life insurance from agents and insurance brokers are vastly different.

Portability

In case you change lenders for your mortgage, you will need to obtain new coverage.  This means your premium could change, based on your age and health status. If you have life insurance, it won’t matter if you change lenders.

Underwriting

Banks offer the same kind of insurance product to all customers.  For this reason, premiums are more expensive as smokers or non-smokers and ages are under the same category.  With group insurance from lenders, you won’t qualify for any special rates that could give you savings.

When you get term-life insurance from an agent or broker, your insurance takes into account whether you are a smoker or not, your age, occupation, health conditions, and credit history. You can qualify for lower premiums if you are low-risk.

It is important to note that if you are a bad risk such as a smoker, overweight, etc., you may find bank insurance rates better for you.

Term of Coverage

A mortgage life insurance policy from a bank is terminated once a mortgage is fully paid.  As most mortgages are 20-25 years, you would be at a “hard to insure” age and suddenly without life insurance.

When you buy term-life insurance from an agent or broker, you can choose to hold the policy long after your mortgage is paid.  You can also convert the policy at any time to permanent life insurance.

Benefits Paid

A bank’s mortgage life insurance is payable to the bank.  It is applied to your mortgage in case of death.  After paying off your mortgage, the insurance policy is terminated.

Amount of Coverage

With a lender’s insurance, your coverage amount decreases along with your mortgage.  Upon completion of mortgage payments, your coverage will be ZERO.

With term-life insurance, your amount of coverage remains the same throughout the term, even if your mortgage is paid off.

Premiums

Premium amounts stay the same whether you buy insurance from your lender or from an insurance broker.  What is significant to note, however, is that premiums are the same but amount of coverage decreases over time with your lender-provided insurance.

In addition, you generally pay higher premiums with mortgage life insurance from banks.

When you think about these differences between bank mortgage insurance products and term life insurance, you will realize that you get more flexibility and value from individual life insurance from brokers.

How to Find Term-Life Insurance To Protect your Mortgage

It is not very difficult to find term life insurance but you need to put a little more effort to find the right one for you.

Term life insurance can give you better protection that goes beyond paying off your mortgage loan in case of death.  It can also give your loved ones financial benefits to help them through a most difficult time and provide them with a secure future.

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