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Mortgage Insurance and Budgeting for an Added Expense

As a homebuyer, there are always additional costs that you must factor into the purchase price of your home, and budget into the regular payments you will be making. Mortgage insurance–which assures a mortgage will still be paid off if the homeowner cannot make payments because of death, disability, or serious injury–is one of those costs, if you choose to purchase it or if your mortgage product requires it.

If you are going to be financing anything greater than 80% of the value of your home, Canadian law will likely require your mortgage to be insured. Some buyers choose to purchase insurance anyway, because it allows them to acquire financing for up to 80% of the home’s value. The insurance premiums are based on the purchase price of the home, as well as the loan-to-value ratio.

Mortgage Insurance Type I: Collective Insurance

There are two types of mortgage insurance available on the market: collective (also known as group) and personal mortgage insurance. Most homeowners end up with a collective policy, because oftentimes they are rushed into purchasing the insurance to help close the sale on the home. The main features of collective insurance are:

  • The policy is held by the lender
  • Premiums are paid to the lender in whose name the policy is written
  • Eligibility and applicant information are only evaluated once a claim has been made
  • The representatives selling the insurance on behalf of the lending institution do not have to be licensed

Mortgage Insurance Type II: Personal Insurance

The second type of mortgage insurance, personal mortgage insurance, is becoming increasingly popular, and it differs from group insurance in almost every way. With personal mortgage insurance, the:

  • Insurance policies are in the name of the mortgage borrower
  • Premiums are paid to the borrower
  • Policies are examined by trained and licensed insurance brokers or agents before being finalized

When you choose personal mortgage insurance, you open yourself to a competitive market where several insurance companies will compete for your business. Consequently, personal mortgage insurance is often much cheaper than collective, and could shave years off the life of your mortgage repayments.

Controversy Concerning Collective Insurance

There have been several cases in Canada recently that have raised consumer concerns about some aspects of collective mortgage insurance. First of all, because lending institutions are not required to license the members of their insurance sales teams, the representatives do not necessarily have a comprehensive knowledge of the policies, and are not always equipped to explain the legal details.

There have been incidents where homeowners who believed they were covered had their claims refused, or had claims refused based on unrelated information in the insurance application that was not analyzed prior to the claim being made. Consequently, collective mortgage insurance is developing a reputation for being misleading to consumers, and many homeowners are turning to personal mortgage insurance instead.