How Does Mortgage Loan Insurance Work In Canada?
Have you recently taken a mortgage loan to buy out your dream property? Are you worried about who will meet your monthly mortgage payments if you become incapable? A mortgage loan insurance can be a remedy for all your concerns. This article covers everything that you need to know about it.
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What Is a Mortgage Loan in Canada?
“Ask me, and If I ever had a wish, I would like to have a home for my family. Even a mere idea of owning a house, which is entirely mine, thrills me to the core,” said Olivia Johnson, a home aspirant searching for homes in the Greater Toronto Area.
Undoubtedly, In Canada, a home is a dream for many, like Olivia. She wants her own house as soon as possible. She would not even shun borrowing money to fulfil her dream.
It led to the concept of Mortgage Loan, using which:
- You can borrow a mortgage loan (usually 70-90% of the asking price) from licensed lenders in Canada, such as mortgage companies, banking companies, private lenders, etc.
- You need to pay the monthly mortgage payments until you pay off the entire outstanding principal amount.
- Some homebuyers make these payments for the entire length of the amortization period.
- Your lender will mortgage your home, which you intend to buy, and act as collateral.
- In case you default on meeting your monthly mortgage payments, then:
- Your lender will foreclose your mortgaged home. And
- Will auction it for recovery of the amount which you owe
What Is Mortgage Loan Insurance in Simple Language?
It gives you protection and assures you will not be losing out on your dream house if you cannot meet your monthly mortgage payments.
It acts as a guarantee and a protective shield that allows your lender to recover your outstanding amount from your insurance company upon the occurrence of an event that makes you incapable of:
- Meeting your monthly mortgage payments and
- Paying off your outstanding mortgage loan
“I used to do a job in a reputed IT company before meeting with an accident that rendered me incapable of working there. Being cripple, most organizations will hire me at a CTC, which was way below what I was getting earlier. This made it impossible for me to meet my mortgage payments, and as a result, I lost my house in foreclosure.,” said Lucas Smith, a resident of Clarington, Greater Toronto Area.
Lucas, coached by his financial advisor, never took a mortgage loan insurance policy. In case he had, he might have been able to save his house, as in such a scenario, the insurance company has taken care of his outstanding mortgage loan.
What Are the Different Mortgage Loan Insurance Policies Available in Canada, and How Do They Work?
Life can sometimes be too harsh, and it can take away everything you have. For this purpose, insurance companies developed policies that aim to buy you peace of mind and financial freedom.
The insurance sector is developing with time, and there is the emergence of new insurance products, schemes, and policies that cater to the diverse needs of the people. The sector covering mortgage loan insurance policies is not too distant either, or there are several such products in the market.
However, broadly, we can still single out three different insurance schemes based on their popularity and practical usage. These are:
1. C. M. H. C Mortgage Loan Insurance (mandatory, sometimes)
It is the most common and purchased mortgage loan insurance scheme in Canada. If your down payment is less than 20% of the asking price, you will be under a compulsion to buy this mortgage loan insurance policy.
Most lenders operating in Canada make it a pre-condition to buy this insurance policy if you pay a down payment of less than 20% of the asking price.
On the other side, having such a policy in your kitty allows you:
- To take a mortgage loan up to 95% of the asking price
By
- Making a down payment as low as 5%
This policy protects your lender, and if you default on your monthly mortgage payments, it will bear your burden of outstanding mortgage debt.
2. Mortgage Life Insurance (optional)
It is an optional mortgage insurance product, and none of the lenders can force you to buy it. However, if you wish to buy such an insurance policy, then it is a possibility that you might secure a favorable mortgage rate. This policy aims to cover your outstanding mortgage debt in the event of your death.
In the general sense, upon the demise of the policyholder, this insurance policy pays out the death benefits to the designated/ nominated family members of the deceased:
- Equal to the outstanding mortgage debt and
- It can only meet such dues
Note that the family members of the deceased policyholder cannot use the death benefits for any purpose other than paying off the outstanding mortgage loan.
3. Mortgage Disability and Critical Illness Insurance (optional)
Disability (permanent or partial) or any critical illness (such as Angioplasty, Bypass surgery, Sclerosis, Cancer, etc.) can be an obstacle to paying your monthly mortgage payments. You might lose out on your property because of impending foreclosure.
A Mortgage Disability and Critical Illness Insurance policy is again an optional insurance product that will meet your monthly mortgage payments or your outstanding mortgage debt in a lump sum, in case:
- You sustained a permanent or partial disability
and
- Suffered from any of the specified critical illness
Wrapping It Up
“Insurance is all about feeling free and enjoying life without worrying much for the future. It even protects you from becoming negative.,” said Lora Crawford, a resident of Brampton, Greater Toronto Area, who recently purchased a Mortgage Life Insurance Policy.
Well, Lora is right! A mortgage loan insurance policy assures you that there will always be somebody meeting your monthly mortgage payments in your absence.
Hence, if you are the sole earner in your family or feel no one will pay monthly mortgage payments in your absence, opting for a mortgage loan insurance policy is worth pondering!
