When buying a home, the different types of insurance that you may be offered, can be a little confusing. If you’ve ever asked, “What are all these insurances?”, keep reading to learn more.
What are all these insurances?
The three main insurances that may arise when applying for a mortgage are:
- Mortgage default insurance
- Life and disability insurance
- Home insurance
Mortgage default insurance
Many refer to mortgage default insurance as CMHC insurance. CMHC stands for the Canadian Mortgage and Housing Corporation and is one of the three main mortgage insurers in Canada. Genworth and Canada Guaranty are the two other main insurers. Different lenders will turn to different insurers depending on the insurer program needed and other factors.
By law, anyone who purchases a home and obtains a mortgage over 80% of the value of the home, must have mortgage default insurance. This insurance protects the lender in case of default. It allows lenders to be able to lend higher loan to value mortgages to clients while reducing the risk of doing so. Lenders can lend up to 95% of the value of the home. Once you achieve 20% down payment you no longer need this insurance. The cost of this insurance is the client’s responsibility and the premium is 4% of the mortgage amount, when putting 5% down. Therefore on a $300,000 mortgage, the premium would be $12,000. If you have 10% down the premium is 3.10% of the mortgage amount and with 15% down its 2.8% of the mortgage amount. Tax is also charged on this premium. The premium can be added to your mortgage however the tax is paid on closing. The value of this insurance to the consumer is that it allows you to purchase a home without having 20% the purchase price saved. The premiums increased earlier this year. Your down payment amount can also affect your mortgage rate.
Learn more: Top five reasons to put 20% or more as a down payment
Learn more: How much down payment do I need to buy a house?
Life and disability insurance
Life and disability insurance is typically an option from your bank, mortgage professional or lawyer. It assists with coverage in the event of death or disability. Some disability coverage will cover the mortgage payment as well as the property taxes. This coverage is optional but important. Ottawa mortgage brokers will be able to review insurance options with you during the mortgage process.
Home insurance is there to protect your home. Many lenders require that you have fire insurance as a minimum and will have the lawyer verify this is in place before advancing the mortgage. For this insurance you can look to your bank or other insurance companies.