Wondering what is mortgage insurance? When do you need it? How much does it cost? In this episode, we discuss the three types of insurance tied to the mortgage process. We explore how long you have to pay for mortgage insurance and is it harder to get one for a second home. Finally we answer how long you need to have mortgage insurance for.
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Today I'm joined by Mujtaba Syed, Manager Mobile Mortgage Specialist with TD Canada Trust [00:00:30]. And the question we're going to answer today is:
What is a mortgage insurance?
So Mo, I've heard 20% down you have to get mortgage insurance below that. What exactly is it?
Yeah absolutely. There's very different types of insurances that you can get. A lot of different ones are actually tied into the whole mortgage process.
We'll start off with the first one which is called mortgage default insurance.
Mortgage default insurance
A mortgage default insurance is actually required in Canada if you're putting less than a certain percentage of down payment down. So if you're putting less than 20% down, the banks require you to get something called default insurance.
[00:01:00] It's actually offered by three different companies. So CMHC which is Canadian Mortgage Housing Corporation, GE which is Genworth, and Canada Guaranty. Three separate companies that offer default insurance to the mix.
So what default insurance technically is, is pretty much before default insurance were available, you would need a minimum of 20% down to buy a home.
So these companies have come up and they've actually made it more affordable and easier for us to qualify for [00:01:30] a home while putting less than 20% down. So now you can actually buy a home in Canada with as low as minimum of 5% down.
What that does in this scenario is you get approved by your bank, and then the insurance company also approves you.
What they do and we'll take a look at to see is we feel comfortable with this lender, and we will provide insurance just in case that this individual cannot pay the mortgage. As we call default.
If they default on that mortgage, then that [00:02:00] company is now insuring the banks. So that is a benefit of having insurance.
What it does it protects the banks but also helps you get into a home sooner, so you don't have to pay 20%.
There's definitely going to be a cost for insurance like there's cost for anything else. It's called insurance premiums. And they differ. They're very different with the percentage that you put down. If you're putting 5% down your insurance premium is going to be different than if you're putting 10% down or 15% down or even 19% down sometimes. So you want to take a look.
You want [00:02:30] to see what the premiums are, what makes sense for you, and see how much you can afford. And then have that discussion there.
Life/Critical illness/Disability Insurance
Another insurance that could be tied into a mortgage process could be called life, critical illness, or disability insurance. Which is more tied to yourself now.
So default insurance mostly protects the bank, but these insurances actually will become payment protection. Protect you as an individual.
As we know, life is very unexpected. Anything could happen. God forbid. Let's say you or a loved one passes [00:03:00] away or they get sick or something's happened at work and you're disabled or this disability's now affecting you from making your payments.
These insurance were actually put in place so your actual payments can be paid on time, so you don't have to worry about losing your home.
In certain scenarios, if you have life insurance or critical illness build into your mortgage, and God forbid something's happened to you, most lenders will even pay off the mortgage as a whole completely and not just payments.
So that's a benefit to you now because now you currently have your home, whatever it's worth, paid off completely [00:03:30] debt free.
And that's now become an asset to yourself. So that's another great conversation to have, another great product to look at in getting into a home.
I feel a lot of clients don't get into mortgage, life insurance, or they feel like it's not beneficial for them. They maybe want to go and shop around for different insurances which is definitely a rate. You can definitely do that.
The only this when it comes down to insurance is you want to take a look at, you always want to be comparing apples to apples. Every insurance policy is not going to be very similar to everything [00:04:00] else. There's so many different things built into a policy. You have to see what makes sense to you.
Also the other thing I recommend to people when it comes down to insurance is it's very easy to get insurance. The hardest thing for insurance is to get a payout of an insurance. You can pay into insurance policy for a very long time, and then God forbid, something's happened.
Let's if something's built into the policy that you didn't read or write, and now you need that insurance to be there. They might be denied just for that reason alone. So definitely take a look.
Do your shopping around, but when you are comparing insurance policies compare apples to apples.
[00:04:30] The last thing that I would consider to be insurance as tied into a home or a home purchase is what we call fire insurance. Which is also mandatory by law to have.
This is almost very similar to having vehicle insurance. When you purchase a vehicle, you need to have vehicle insurance for accident, fire, theft, et cetera, et cetera.
So fire insurance is also required to have. It has nothing to do with your mortgage or with your lender. It's something that you do on a personal level. You [00:05:00] do that for fire.
If there's a fire in your home or if there's a theft or a break in in your home. You would have those insurance put in place to safeguard you and protect you. Those are three insurances that I would say are tied into mortgages, home purchases, or real estate purchases.
How long do you have to pay for mortgage insurance?
So for default insurance, how long do you have to pay that for? Is it for the length of the mortgage?
So default insurance is a one time fee. It's not a monthly thing. [00:05:30]
The insurance company will charge you one time and it'll go on top your mortgage. But once you pay it, it's your choice now. You could keep it on there and you could pay as long as you want to.
But technically an insurance will always be there until you have enough equity in your home to make your mortgage from an insured mortgage into a conventional mortgage.
A conventional mortgage just means now that the maximum financing on your home is no greater than 80% of what it's worth. [inaudible 00:05:59] won't allow you LTD.
So [00:06:00] you might've started off with 5% down which means you have 95% lending on your home. And over time you pay that down to 80%. Now your home has actually gone from an insured to a conventional mortgage.
So once again it's a one time fee. You can pay as long as you want to until you have enough equity to make your home a conventional and that's when the insurance will no longer be tied to your home.
Is it harder to qualify for a default mortgage insurance, let's say, for your second home?
[00:06:30] It just depends. Some lenders, for example ... I'm sorry. Not lenders.
Some insurance companies like CMHC will not lend to you again or provide insurance to you again if you already have one product with them. But there are other insurance companies available.
There are Genworth and Canada Guaranty which might. One of the insurance companies wouldn't, but you do have access to the other two [inaudible 00:06:58] as well.
That's not the end [00:07:00] all be all.
If you already have one home and it's insured and you want to purchase another primary residence.
So technically that's the catch.
Insurance is only for primary residents. You cannot purchase an investment property or a rental property and then try to use insurance to qualify for that.
It's just an added benefit for people looking for primary residences. So if you have one already, you can still qualify and get insurance. It'll just have to be with a different insurance company.
And your lender will know exactly who to talk to [00:07:30] and who to reach out to to make sure that that property's insured for you.
So how long do you need mortgage insurance for?
I know I asked the question about length of the mortgage, but I guess do most people get another mortgage insurance when they buy their second home?
Yeah. Insurance is tied to property. So technically the first property you get insurance is that insurance is already tied to that property. It's not going to be able to carry you over unless you're porting your mortgage to the new property. [00:08:00]
So if you're keeping your mortgage on the first property and now you want to buy a second home, there's going to be a whole new insurance on that property.
Because insurance is, like I said, tied to the property not to you as an individual. You can pay that as long as you want to until there's enough equity in your home to make a conventional.
Karl Yeh: Perfect. Well do you have anything else to add?
Mujtaba Syed: No, I think that's great.
Karl Yeh: Awesome. Well thank you very much for joining us and we'll catch you next time.
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About Mujtaba Syed:
Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.