The housing situation in Toronto and the GTA right now is pretty crazy (this was written as of May 2021).
And as if things weren't inflated enough, why are so many Ontario homeowners paying double, triple and in some cases even quadruple for their mortgage insurance?
For starters - it's because most people don't even realize it.
Here's a typical scenario:
A young couple walks into a bank, they get approved for their mortgage, and their financial advisor or mortgage specialist asks them "do you want to insure your mortgage?".
And if the couple is smart, they'll of course respond "Obviously!".
What did they do wrong?
It starts with understanding what mortgage insurance is, and how the process works.
Mortgage insurance, or "mortgage creditor insurance" as it's known in the banking world, ensures that the lending institution which issues the mortgage, will pay off the mortgage balance held by the borrowers, in the event of their passing.
In other words, your bank will pay off your remaining mortgage balance in the event that you pass away during the life of your mortgage.
It's a good product - but it's not great.
Here's why.
It's Expensive.
With mortgage creditor insurance, your monthly/annual premiums automatically increase every single year.
This is because with most banks, there's no in-depth application involved. You just answer a few questions, and boom! You're approved.
Here's why it's expensive - the bank doesn't have any real analysis on your health, they're taking a big risk in assuming that you're healthy.
What banks do to combat this risk, is automatically increase your premium every year, assuming that each year that passes, you're getting older, and with age comes an increased risk to a health condition.
I personally know people who are paying over $300/month in mortgage insurance, and they think it's normal!
Your Bank Gets The Money.
With mortgage insurance, the bank is your beneficiary. If you were to pass away with a mortgage liability, the bank will pay off your mortgage.
You Get Nada.
Similar to #2, with mortgage insurance, if you were to pass away with a mortgage liability, the bank will only pay the remaining mortgage balance. You don't see a dime. Funeral expenses, expenses for downsizing, moving expenses and any other existing debts are paid with your own hard earned dollars.
Portability.
If you sell or move houses, or even refinance your current mortgage, you'll have to get new mortgage insurance - which will most likely be more expensive because you'd have aged, and thus be an increased risk to your bank.
Look...financial institutions who sell mortgage insurance mean well - the problem is they just don't have any other option to provide you with.
Luckily, there's an alternative to mortgage insurance - it's called term insurance.
Term insurance is a life insurance product which provides coverage for a fixed period of time.
Here's how it works:
Term insurance is typically used to protect one's temporary liabilities (example: a mortgage). Many Canadians use term insurance instead of mortgage insurance to protect their mortgage, here's why:
It's cheaper than mortgage insurance.
The premiums you pay for a term insurance product are fixed. Meaning what you pay in year 1, is what you'll pay in year 10, 20 or 30 (depending on how long your term is).
You can name a beneficiary.
With mortgage insurance, your bank is the beneficiary, with term insurance, you can name your own beneficiary and they will receive the FULL coverage amount tax free, not just what's remaining on your mortgage.
It's flexible.
It doesn't matter whether you move, sell, or refinance your mortgage. Term insurance is a fixed coverage amount which stays with you until your term is over. In addition, you can use it to cover other liabilities, not just your mortgage (for example: an investment property, student debt, etc...).
With term insurance you even have the option to extend your coverage beyond the specified term. You can also convert your term coverage to permanent coverage!
Below are a couple of annual quotes I pulled for two different scenarios so that you can compare pricing:
Scenario #1
A 30-year old man, non-smoker, purchases a home. The mortgage on that home is $600,000.
He requests a $600,000 term-20 insurance policy:
Scenario #2
A 45-year old single mother, non-smoker, owns a home with a $50,000 mortgage on it, and recently purchased an investment property that has a mortgage of $1,000,000 on it.
She requests a $1,050,000 term-10 insurance policy, and names her 2 kids as beneficiaries:
These are quotes I pulled on May 3, 2021. Quotes are subject to change on a daily basis.
Term insurance is cheaper AND provides more flexibility.
If you are thinking about buying a home, and want to insurance the mortgage on that home, or if you have mortgage insurance right now and think you might be overpaying, text or call me and I can give you a quote - it takes less than 2 minutes!
Thanks for reading!
