BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

If you plan on applying for a mortgage, then I can guarantee you’ll be offered “insurance” for it, in one or more forms. Other than “default insurance” which may be mandatory, there’s such a thing as mortgage life insurance. Hoes does it work?

Nobody really wants to think about it but what would happen if you died and left behind a big fat mortgage loan for others to contend with?

Let’s start with mortgage loan insurance, which is optional. However, if you borrow more than 80% of the value of the home you’re buying, then it actually is mandatory. In that case, a mortgage loan can’t be taken without it. This is for mortgage default insurance which will reimburse the bank in case you don’t pay. Most people will think of CMHC for a mortgage that’s insured against default. The lender (the bank) pays the premium to CHMC and then passes the cost on to you.

Since it’s a form of insurance, there is a premium to be paid. CMHC has prepared a handy premium table on their website. It looks like this: http://www.cmhc.ca/en/co/moloin/moloin_005.cfm. This kind of mortgage loan insurance is required when home buyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a down payment of as little as 5%.

A basic premium calculation tool is available on the CMHC website: http://www.cmhc-schl.gc.ca/en/co/buho/buho_013.cfm# . The calculator comes with a disclaimer, basically explaining that it’s not a guaranteed or precise tool. Obviously, you should talk to your financial expert for further advice and not rely on the website.

Has been around for many decades: The Canadian Mortgage and Housing Corporation. Many Canadians have already benefited from what CMHC has to offer.

MORE ABOUT CMHC

The CMHC website is laid out in a fairly customer-friendly way. A great introduction page is right here:  http://www.cmhc.ca/en/co/moloin/ with further links to relevant pages. A popular page on this website is the general affordability calculator: http://www.cmhc.ca/en/co/buho/buho_005.cfm .

Many people have no idea how to pay the CMHC insurance premium. Although the premiums can be paid up front in a lump sum, most people choose to blend them in with their mortgage loan payments. Consistent with the directions set by the office of the Superintendent of Financial Institutions for private sector insurers, CMHC maintains sufficient reserves to meet anticipated future claims.

Even if your mortgage amount is 80% of the property value or less, you could benefit from CMHC insurance through more advantageous mortgage rates – after all the bank is secured so they can give you the best possible rate available.

CMHC insurance is not free. The greater the perceived insurance risk, the higher the premium. Luckily, the premium can be added to the mortgage sum.

HOW ABOUT THE CHMC PREMIUM

When a lender has received CMHC Mortgage Loan Insurance on your home loan after April 1, 1996 and you are purchasing another home, there may be a mortgage portability option. Portability allows the repeat user of CMHC insured mortgage financing to save money by reducing or eliminating the premium on a new insured loan for the purchase of another home. Please check with your mortgage specialist or lender for the terms and conditions of mortgage portability. There are premium credits available and there is a system of portability that would be tied to one’s general mortgage conditions.

Default insurance in one thing – how about situations where the borrower dies or gets severely injured or becomes disabled. Various insurance products are available to cover these eventualities as well.

Various available mortgage insurance products can cover the same thing, more or less. It takes a bit of effort to spot the differences, if any.

WHAT IS: MORTGAGE LIFE INSURANCE

CMHC Mortgage Loan Insurance is not to be confused with Mortgage Life Insurance. This form of insurance is specifically designed to protect a repayment mortgage loan. If you were to die while the mortgage life insurance was in force, the policy would pay out a capital sum that will be just sufficient to repay the outstanding mortgage loan.

When such insurance commences, the value of the insurance cover must equal the capital outstanding on the repayment mortgage and the policy’s termination date must be the same as the date scheduled for the final payment on the repayment mortgage. The insurance company then calculates the annual rate at which the insurance cover should decrease in order to mirror the value of the capital outstanding on the repayment mortgage loan. Even if the client is behind on repayments, the insurance will normally adhere to its original schedule and will not keep up with the outstanding debt.

Based on the mechanics of the product, mortgage life insurance is a financial product that declines in value as the client-borrower pays continuing premiums. It may be worth investigating traditional life insurance to seek a level of financial protection for considerably smaller premiums.

Since we're talking large amounts of money and a long-term commitment, it's a good idea to learn more about this topic (suggestions are linked below).

MORE blog articles about mortgage financing are posted here:

Just an average mortgage loan: http://www.mennorealty.ca/Blog.php/mortgage-151000

Who knows of mortgage fraud? http://www.mennorealty.ca/Blog.php/off-the-rails

Who’s giving out free money? http://www.menno.ca/?p=20086

Mortgage insurance or not: http://www.mennorealty.ca/Blog.php/80-or-81percent

Some are still complaining about the new mortgage rules? http://www.menno.ca/?p=20259

Sunshine Coast lifestyle choices: http://www.menno.ca/?p=20236

The real estate industry: http://www.menno.ca/?p=20179

Other ways of applying for a mortgage: http://www.mennorealty.ca/Blog.php/renewal-1