What You Need To Know About Different Types Of Insurance
In getting a mortgage, there are different types of insurance you may end up applying for. Some are optional, others are required. The following describes them in detail:
Mortgage Loan Insurance
Mortgage loan insurance, also called hi-ratio mortgage insurance, is required by law to help protect the lenders by insuring them against borrower default if the mortgage is more than 80% loan-to-value, or the borrower pays less than 20% down payment. It guarantees that the lender does not lose money in case of borrower default. It is usually provided by CMHC (Canada Mortgage and Housing Corporation – a crown corporation), Genworth (GE Mortgage Insurance Company – a private corporation), or AIG United Guaranty.
The insurance premiums are paid by the borrower either directly as a one-time payment or added to the mortgage amount. It ranges from .50 to 3.75% of the mortgage balance. For every 5 year increase in amortization beyond 25 years, a .2% increase is added to the premium rate.
Title Insurance
Title insurance protects your ownership to the property and protects you against fraud (e.g. fraudulently obtained mortgages on your home), errors in surveys or other official public records, encroachments onto neighboring properties, zoning infractions, and many more known and unknown defects that could affect your ability to sell your property in the future.
It provides protection for both the borrower and the lender because it is a contract under which the title insurer indemnifies a property owner, lender or borrower against actual loss or damage sustained from covered title defects, fraud or forgery. It is not a guarantee of title, but rather compensates an insured if title is not as set out in the policy. Unlike house insurance, you only pay a one-time premium with no deductible and you receive industry leading protection.
Mortgage Life Insurance
Lenders cannot require you to purchase Mortgage Life Insurance. The only insurance they can legally require you get is fire insurance and hi-ratio mortgage insurance. However, it is important that you get some insurance coverage that will enable your beneficiary to pay off your mortgage in the event that you pass away. Mortgage Life Insurance pays the balance owing on the mortgage in the event that the owner or one of the owners dies. The intent is to protect survivors from losing their home.
While having a mortgage life insurance is recommended, it is better to get a normal term life insurance that could pay your beneficiary the equivalent value of your home, instead of just the balance remaining on the mortgage, at the time of the payout. If you don't have life insurance or would have a difficult time obtaining it, Mortgage Life Insurance may be a viable and economical option. Should you not have a normal life insurance by closing date, we recommend that you sign up for the mortgage life insurance while you speak with your financial planner or insurance agent about getting a life insurance with the right amount of coverage for your estate needs. This is so that in case anything happens, you or your beneficiary is covered. You will have up to 30 days from the time you sign up for mortgage insurance to cancel it without getting charged.
Fire Insurance
Fire Insurance is usually required by the lender to be in place (as confirmed by the lawyer) by the time you go and sign the mortgage papers with your lawyer. It ensures the borrower has adequate coverage to pay off the mortgage for the property in the event of fire or other damages stipulated in the policy signed up for.
