There are two types of mortgage insurance people often confuse. One is mortgage default insurance and the other is mortgage life insurance.

MORTGAGE DEFAULT INSURANCE

One of the first decisions to be made in the mortgage application process is whether or not the mortgage needs to be insured.

Mortgage lenders like banks, trust companies, credit unions and insurance companies are regulated by either the Federal or Provincial governments. Generally speaking, regulations state a maximum loan-to-value ratio of 80% or more.

This means that these institutional lenders cannot normally make a loan that is more than 80% of the market value of any property unless the mortgage is insured. Mortgage loan insurance may be available for loans up to 95% of the property value.

This mortgage insurance provides protection for the lender in case of the borrower default. Thus, mortgage insurance acts to transfer risk from the mortgage lender to the mortgage insurer. The mortgage lender pays a mortgage insurance premium to the insurer in exchange for assuming the risks of the borrower defaulting and generally passes that cost onto the borrower.

There are three mortgage insurance firms in Canada, Genworth Financial, CMHC (Canada Mortgage Housing Corporation and AIG United Guaranty.

In general, the process of obtaining mortgage loan insurance is similar for the mortgage insurance program offered by all three companies. The prospective borrower applies for a mortgage loan and loan insurance at the same time. If both applications are accepted, the lending institution will calculate the amount of mortgage premium the borrower pays.

High ratio mortgages are subject to a graduated mortgage insurance premium based on the loan-to-value ratio. The higher the loan-to-value ratio is, the higher is the premium.

The lender pays the insurer a single premium, the cost of which is generally passed on to the borrower. The premium is paid at the time of closing. The borrower either pays the premium in a lump sum payment, or more commonly, adds it to the loan amount and repays it with the regular mortgage payment.

If the premium is added to the loan amount, the amount of the premium is not included in the calculation of the loan-to-value ratio. However, the gross debt service ratio (GDS) applies to the full amount of the mortgage payments, including the amount that repays the insurance premium. As well, if the premium is added to the loan, the full face value of the loan, including the premium, is insured. No additional fees or premiums for loan insurance are charged annually, or upon renewal of a mortgage at the end of the term, even though the insurance is in force for the full amortization period.

If a borrower defaults on an insured mortgage loan, the lender begins the legal process of Power of Sale and makes a claim against the borrower on the personal covenant. Also, the lender makes a claim with the insurer. Once the Order for Sale is granted at the end of the redemption period, the lender lists the property for sale. If the sale proceeds are insufficient to repay the mortgage balance, the insurer pays the lender the difference. At that time, the lender assigns the personal claim against the borrower to insurer. (Note: the legal process may differ depending on the province where the property is situated.)

Genworth and CMHC both have default management programs to provide lenders with the necessary tools to make timely and cost effective decisions to assist their customers in dealing with temporary financial setbacks.

MORTGAGE LIFE INSURANCE

This type of insurance is sometimes referred to as “mortgage insurance”. However, it is important to distinguish it from mortgage default insurance since it is also sometimes just referred to as “mortgage insurance”.

The key difference between these two types of insurance is in who receives protection from insurance. Mortgage insurance protects the lender in case of the borrower defaults on the mortgage payments and mortgage life insurance on the other hand, protects the borrower.

As an accredited mortgage professional, one of the “Value Added” products I bring to every mortgage transaction is Low Cost Group Life & Disability Insurance. I have compared what’s available on the market and I am able to offer you one of Canada’s “Least Expensive” insurance policies from Canada’s largest insurer Manulife.

I recommend to all of my clients that their mortgages be life insured. Probably this is the biggest investment you and your family are going to make both financially & emotionally.

If you are married and something should happen to either one of you, the surviving spouse is going to suffer a huge emotional upheaval. The last thing I want to see is the surviving spouse have to face the possibility of the loss of the family home on top of the loss of a loved one… and that is why, I as a mortgage professional like to see all of my clients have their mortgages life insured… really, it is only “common sense” to have your family adequately protected.

Sometimes clients say that mortgage insurance is too expensive but I have to disagree with them. Let’s put this into “Real Life” terms. What we are talking about is less then the price of a cup of coffee per day. Obviously the financial security of your family is worth more then the price of a cup of coffee a day.

Others may say – “I have a lot of insurance at work” but how many of us are going to work at the same job until age 65? Manulife provides inexpensive insurance for the life of the mortgage, no matter what happens to your job in the future. If you change jobs your benefits may not be as good as you presently enjoy so it’s just good common sense to have your mortgage insured separately and that provides peace of mind for you and your family, no matter what the future holds.

Now let’s say you think you already have enough insurance, say you have $250,000 term policy and you may be thinking that you don’t need any additional mortgage insurance…

Well, I am glad to see that you have existing insurance. However, let’s look at this in a little more detail.

Your existing insurance is meant to provide income replacement for your family. If something happens to you, your spouse takes the money to the bank (she is not going to take any risks), let’s say the bank pays her 5% on a 5 year GIC, yielding $12,500 in pre tax income, now to replace your $50,000 per year income, your spouse has to draw down an additional $35 - $40K from the principal, so the proceeds of the life policy expire in approximately 6 or 7 years.

However, if you factor in the payout of a $125,000 mortgage that leaves only $125,000 available as “income replacement”… take the same scenario… $125K GIC @ 5% = $6,250 pre income tax, take out $40-50K in principal to make up existing income and that $250,000 term life insurance policy is gone in approximately 3 years.

Now logically we know that the surviving spouse and family need more then 3 years to get their emotional and financial life “back on track”… so that’s why I recommend to all my clients to take mortgage insurance in addition to the “income replacement” term policy. Financially, as you can see from the figures, it only makes good common sense!!

Here are more reasons why you need Manulife mortgage insurance…

On occasions the lenders insurance may be few dollars cheaper then Manulife…. The lenders insurance may be a little cheaper now, BUT over the life of the mortgage it will prove to be a lot more expensive. Let me take a couple of minutes to explain the benefit to you of Manulife’s “Full Portability”.

This policy covers you for the life of the mortgage, no matter which lender gives you the best rate at the time of next and all future renewals. The lenders insurance policy can tie my hands in getting you the best rate in the future and here is why…

As you probably know insurance rates increase with age, also health issues may make you ineligible for insurance in the future. If you take the lenders insurance now because it is a few dollars cheaper, I can guarantee you that at the next renewal date, that insurance coverage will be a lot more expensive, if we go to another lender for the best interest rate on your mortgage… AND conditional on your health condition insurance may not be available at all from a competing lender…

SO the major benefit of Manulife is that the life insurance and the premium payments are guaranteed for “The Life of Your Mortgage” no matter who the lender, that allows me to switch your mortgage to whichever lender has the “Best Rate”… That way I will be able to save you thousands of dollars in the future… AND you will never have to pay more for your insurance, nor you will have to face the possibility of not being able to buy insurance at all, due to some future health issues… that is why the “Full Portability Feature” of Manulife mortgage insurance is so beneficial to you!!!

DISABILITY COVERAGE

This is the very last topic to quickly cover here because over 60% of clients who take Life Insurance also take Disability Insurance.

In addition to being the least expensive disability coverage available, Manulife coverage provides you with 3 major benefits. They have structured the disability coverage to legally provide “payment replacement” and not “income”.

The 3 main “Benefits to You” are:

1) Disability benefits are not reportable to either CPP or your private insurer, therefore no “claw back”

2) Benefits are not subject to income tax

3) Manulife will also pay your property taxes as long as the lender disburses the property taxes, ie… if your mortgage payment is P.I.T… then taxes are included, this would mean you get an additional benefit of typically $200 - $400 per month!!!

Manulife mortgage protection plan is yet another reason why thousands of homebuyers and homeowners are saying no to their banks and instead they get their mortgage right here.

Do what thousands of people have already done…

Select me... Joe Malek, AMP to be your mortgage professional for life and achieve your financial freedom!