Why are there so many different types of insurance and what do they do!?
When you buy a house and get a mortgage, you will be presented with 4 different types of insurance at various stages of your transaction. This can be super confusing as a buyer but it may help to break it down by:
Who’s getting insured and why? Who’s paying for it? Is it optional?
1. Mortgage Insurance
The very first insurance you will be presented with is mortgage insurance. Let’s take a look at our breakdown above to see if we can better understand it… In Canada, it is mandatory to have this type of insurance on a property you buy with less than a 20% down payment. Why? Because the loan amount VS value of property is so high, the risk is too high for a lender to take on unless they are insured. This insurance covers them in case the borrower defaults on the mortgage. The cost is paid by the borrower and is determined by their down payment (5% - 19%) as well as the purchase price. The premium itself is typically capitalized (included) in the mortgage so the borrower does not have to pay this up front.
2. Personal Insurance
Next we have insurance that covers YOU! Personal insurance (AKA creditor insurance) is an optional insurance you may take to protect you and your family in case something happens to you and you cannot pay your mortgage payments. Your options would typically include Life, Disability and in some cases, Critical Illness. It’s best to have a chat with an insurance specialist to ensure you are making an informed decision and to thoroughly understand the outcome of your decision. This insurance is typically paid semi-monthly or monthly and is calculated on the original mortgage balance. In some cases, you can reassess your balance at the end of the year to lower your premium!
3. Property insurance
Who else can we insure!? How about the house itself! When you get a mortgage, the lender’s entire security is the property so this also needs to be protected. Property insurance would protect the house from natural disasters such as hail, fire, floods etc. It’s best to call around for some quotes to save a few bucks but in most cases, lumping it into your existing insurance for a “package deal” is the way to go. You will have to provide confirmation of this insurance to your lawyer when you sign with them before your possession date!
4. Title Insurance
Drum roll please…. Last but not least we have Title Insurance. This is likely the least known insurance of the bunch so let's try to understand it clearly and simply.
The title of your house is basically a legal report that outlines the rights and ownership of that property. This is important for both the lender AND the borrower because it’s YOUR HOUSE and THEIR SECURITY (as mentioned in point 3).
Lender title insurance covers them. When a lender gives a mortgage on a property, they have a “charge” on your title meaning they have rights to that property so their title insurance is taken to legally protect that interest in the property. In some cases this is mandatory and would come at the borrower’s expense.
Title insurance for the borrower is optional and covers YOU in case a claim would arise on your property after you purchased it. Some examples of this would be from contractor liens, survey errors, boundary disputes, code violations etc.
OK BIG DEEP BREATH…
So quick recap: WHO AND WHAT ARE WE INSURING? We are insuring the lender, the borrower, the property and the title of the property. WHO PAYS FOR IT? Borrowers typically pay for all types of insurance in a mortgage transaction. IS IT OPTIONAL? The only fully optional insurances are personal and borrower’s title insurance.
Don’t forget that we’re here for you every step of the way so no need to remember every detail. Hopefully this just acts as a good reference point to feel a little more confident through the process.
Thanks for listening :)