By Brendan Wycks, Co-Executive Director, CAFII
Spring is the time of year when many Canadians think about buying their first home or selling and trading up to a better one. And, when they start thinking about the many issues that come with buying a house.
The first two questions potential buyers need to ask themselves is “How much house can I afford?” and “What size of mortgage will I qualify for?” Fortunately, most financial institutions can help answer those questions once a customer provides information about their financial situation and how much of a down payment they will have available for the home purchase.
Insurance is another topic a home buyer will want to consider, and that consideration should include at least three products; Mortgage Default Insurance, Mortgage Life Insurance, and Home Insurance. The first two of these products – Mortgage Default Insurance and Mortgage Life Insurance – are sometimes confused by consumers, especially by first-time buyers.
Mortgage Default Insurance allows borrowers to obtain a mortgage on a property with a lower down payment (as low as 5% for homes under $500,000, and 10% for the portion between $500,000 to $1,000,000) than would be required for a conventional mortgage. This type of insurance, required on all mortgages with down payments of less than 20% of the purchase price, is also known as a high-ratio mortgage. The maximum amortization period, or maximum payback duration for a high-ratio mortgage is 25 years.
This insurance provides a “safety net” for federally regulated financial institutions, such as banks, that lend money on the security of residential real estate, and it increases the number of Canadians who may be able to qualify for a mortgage. Premiums for Mortgage Default Insurance are based on the amount of the mortgage and can be added to the mortgage amount and repaid over the full duration of the mortgage.
Conventional mortgages, which require a minimum down payment of 20%, do not require Mortgage Default Insurance. Any home with a purchase price of over $1,000,000 requires a minimum 20% down payment.
Mortgage Life Insurance, in contrast, is a type of optional Credit Protection Insurance that pays out your mortgage balance (up to the maximum specified in the certificate of insurance) in the event of your death, making it affordable for your surviving spouse and/or family to remain in your home without financial duress. If your family relies on your income to make its mortgage payments, Mortgage Life Insurance is one way to protect the financial future of your loved ones.
Consumers who purchase Mortgage Life Insurance usually have the option to add disability, critical Illness, and job loss coverage, to protect their family further against not being able to make its mortgage payments.
Home Insurance, the third type of house purchase-related coverage, can provide valuable financial protection against incidents that cause damage to the property you own —including fire, lightning strike, wind and hail, explosions, falling objects, vandalism, theft, and other risks or “perils.” This insurance typically covers both property damage and liability exposure, including medical payments in case someone gets hurts on your premises.
If you need a mortgage to be able to purchase your home, your lender will require that you have Mortgage Insurance in place to cover these types of risk.
When contemplating the cost of buying and maintaining a home, Canadian consumers should think about whether they will need these three types of insurance protection, and what the cost will be.