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.
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 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:
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.
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.