Not all people can come up with a substantial down payment on a property. If the lender thinks that your down payment is too small and the has to finance more than 80% of the purchase price, you may be approved for a high-ratio mortgage. Theres one requirement before getting approved for a high-ratio mortgage: it must be insured.
Mortgage insurance therefore works for both lender and borrower. Should you become ill or lose your job, your insurance automatically pays off your mortgage. The lender knows that should anything happen to you, their loan will be paid by the insurance company. The fees are over and above your mortgage payments.
Most banks and credit unions in fact finance up to 80% of a mortgage, but charge a high-ratio insurance fee on the total mortgage amount. In Canada, mortgage insurance is available through Genworth, the CMHC, and more recently, Canada Guaranty, although the insurance can be processed at the bank or lenders office.
The premiums you pay for the insurance hinges on the whole concept of risk. The higher the loan or debt, the higher the risk, and therefore the higher the insurance premium. Most lenders will include the premium with the monthly or weekly payments. Or, you might pay the lump sum of the premiums when you finalize the mortgage transaction. Premiums can range anywhere between 0.5% and 3% of the total mortgage amount, depending on how much risk the lender is exposed to.
Mortgage insurance is available to borrowers who purchase property, whether it be a single family home, a condominium, a duplex or triplex, or even a commercial building.
Life Insurance Versus Mortgage Insurance
You may want to consider purchasing life insurance instead. With a mortgage insurance policy, the lender is the beneficiary. With life insurance, you get to select your beneficiary.
With mortgage insurance, the insurance amount decreases with the mortgage, and you run the risk of not receiving adequate protection after a certain number of years. Not only that, your insurance amount decreases but you pay the same premiums. With life insurance, your coverage and premiums remain the same.
If you change lender, you cannot transfer your mortgage insurance to the new lender.
When deciding between mortgage insurance and life insurance, people are tempted to go with mortgage insurance because the premiums are lower, but this may be an disadvantage when the time to claim protection comes.
As for the underwriting principle: the underwriting for a mortgage insurance policy, when purchased from a bank, is done on a post claim basis. This means that the insurance is not underwritten until a claim is made. Think of the implications. The insurance company can decide that youre not eligible for a payout even if you have been paying premiums consistently.
In a life insurance policy, a licensed insurance broker will examine your medical history before a policy is issued. Once the policy is issued, you start paying premiums. This way, you will know whether or not you have been approved for life insurance.
Mortgage insurance is a standard, one size fits all. Everyone is considered equal risk. The premiums are calculated according to your age and the size of your mortgage. No discounts are offered to women or non-smokers. The premium payments do not decrease as the mortgage is paid off.
In a life insurance policy, your premiums are determined on your personal situation. The premium amount depends on your health and health exam. Unlike mortgage insurance, women and non-smokers receive a discount.
As for the payout itself, the policy will only pay the balance outstanding of the mortgage. If your mortgage was originally 100,000 but have paid off $70,000 by the time you make a claim, the payout will only be $30,000. With life insurance, if you purchased coverage for $100,000, your beneficiary gets the full $100,000.
And finally, mortgage insurance will pay your lender. You have no say in this matter. With life insurance, you have the right to select who your beneficiary will be.
There are advantages for having your own term insurance. One principal advantage is its portability. This means that even if your mortgage is paid off, you still have the life insurance. But should you become ineligible for life insurance because of a health exam, you may still qualify for mortgage insurance without a medical exam, although youre strongly encouraged to speak to your lawyer about this.