This piece was originally published on October 13, 2011, and was updated on May 1, 2023.
Mortgage default insurance versus mortgage life insurance
There’s a lot of jargon in the mortgage industry and it can be difficult to make sense of all the different terms, especially when you’re a first time homebuyer.
Mortgage insurance in Canada is an important part of negotiating mortgage territory and understanding the difference is crucial to determining what best suits you and your family’s needs.
Mortgage default insurance
Default insurance is mandatory in Canada for mortgages that exceed 80% of the property value. These are known as high-ratio mortgages. So, for down payments from 5% (the minimum in Canada) to 19.99%, you will have to purchase this insurance.
The purpose of default insurance is that if the borrower fails to make payments (i.e. defaults) on their mortgage, this particular insurance pays the lender instead. So it essentially protects lenders.
Mortgage default insurance usually costs homebuyers from 1.75% – 3.15% of the mortgage amount. However, this insurance is beneficial to the buyers’ market because lenders can offer lower mortgage rates when the risk of default decreases. The risk is reduced for all home buyers because of mandatory mortgage insurance.
Minimize your default insurance
There are two ways in which you can minimize your mortgage default insurance: 1) You can increase the percentage of your down payment or 2) you can decrease your amortization period.
By putting in a down payment of at least 20%, you can avoid having to purchase this insurance. Also, for an amortization period between 26-30 years, there is an insurance premium of 0.2% as opposed to paying 0.4% premium for periods of 31-35. With an amortization period of 25 years or less, there is no premium charge.
How is it paid?
Mortgage default insurance does not require a lump sum payment at the time of purchase like closing costs do. The insurance premium is added to your monthly mortgage payment. Use our mortgage insurance calculator to determine what your payments will be like.
Mortgage insurance is often referred to as CMHC insurance as most Canadian lenders accept mortgage default insurance from the Canada Mortgage and Housing Corporation (CMHC). Other default insurance providers are Sagen and Canada Guaranty Mortgage Insurance.
Mortgage life insurance
Mortgage life insurance is also known as mortgage insurance or creditor insurance. Life insurance guarantees that the outstanding mortgage balance is paid off to the lending institution in the case of the borrower’s death. Life insurance is a good way to protect your family and their home. As opposed to default insurance, life insurance is an optional insurance policy.
Mortgage insurance policies will only cover you for the amount of your remaining mortgage that you owe the bank, as it works as a reducing balance. As you pay off your total mortgage amount, your coverage amount decreases with it.
How is it paid?
Life insurance premiums are added onto your monthly mortgage payment.
Compare life insurance rates to ensure that you get a good rate for yourself and your family. Generally, the insurance cost is based on your age at the time of application and the amount of your mortgage. The premiums may not increase for the term of your mortgage, even as you get older. However, this may not be the case with all lenders. So ensure that you do your research to find the best policy.
To conclude, mortgage default insurance and life insurance address different aspects of your mortgage. Whereas default insurance is mandatory depending on your mortgage down payment and amortization period, life insurance is optional but recommended if you have family that you want to protect.