Mortgage insurance vs. homeowners insurance. Po-tay-to, po-tah-to, right? They’re both complicated investment terms that are pretty much the same thing.
Whether you’re a first-time home-buyer or part of the nearly 69% of Canadians who own their home, we’re here to help you finally understand the differences.
Both terms are related and spoken about together. And both are critical to home-ownership. That makes identifying the differences challenging to say the least.
Even though it’s easy to confuse the two, you may be surprised to learn they’re more like siblings than twins. Here’s a guide to the key differences and how they may apply to you as a prospective or current homeowner in Canada.
The World of Mortgages
Mortgages are very entwined with home-ownership, and especially for first-time buyers. Census figures show that in 2016, the number of Canadians with mortgages exceeded 5.6 million.
So what is a mortgage exactly? A mortgage is essentially a legal agreement you enter into with a lender. The agreement confirms that you’ll borrow a certain amount of money in order to be able to purchase a home, and you promise to pay it back.
In exchange, the lender owns your property until you do pay it in full. If you fail to pay the loan back as agreed, the lender can take the property back.
While that covers the basic gist of mortgages, there’s a lot of variety in the actual agreement you could find yourself in. That starts with the type of mortgage you qualify for based on factors like income, assets, and credit score.
That information will impact the amount of money you’ll pay for a mortgage, but you can probably expect to make monthly payments. These payments cover the amount you owe on the loan against any payments you’ve already made. You’ll also pay an interest rate too.
One other cost that may be bundled up with your monthly mortgage payments is mortgage insurance.
Mortgage Insurance at a Glance
If you’re considering buying or have bought a home, you’re probably familiar with this figure: 20%. In general, that’s the amount most people aim to save up for a down payment on a house.
The good news is that in Canada, you don’t have to wait until you can put 20% down to apply for a mortgage. You can pay as little as 5% on a house that costs up to $500,000. If it’s more than that, the percentage you have to put down changes a bit.
While 5% down can help you secure a mortgage, because it’s below that 20% baseline, you are required by law to purchase mortgage insurance. When the lender agrees to loan to you, they have to pay for the insurance that’s required on it. So in order to cover that cost, they’ll wrap the insurance premium into your mortgage.
Since you’re presenting a lower down payment, you present a higher risk to the lender. Mortgage insurance helps reduce that risk. It protects the lender in case you default on payments.
Buying mortgage insurance is something you’ll do at the same time you’re applying for a mortgage. Most Canadians purchase this coverage through their lenders from the Canada Mortgage Housing Corporation (CMHC).
How much will mortgage insurance cost exactly? The amount you’ll have to pay for mortgage insurance will be based on the risk of loaning to you. It also factors in the percentage of what you can put down against the price of the home.
This is not to be mistaken with another type of mortgage insurance you may run into, and that’s called mortgage hazard insurance. Basically, it’s sort of like a life insurance policy on your mortgage. It covers you in case something prevents you from paying your loan back — like an illness that keeps you from working, or even death.
What you Need to Know About Homeowners Insurance
Homeowners insurance can be a moving part of the mortgage acquisition process. That’s because some lenders require proof of this coverage before agreeing to lend to borrowers.
But it’s really a separate process altogether.
The main purpose of homeowners insurance is to protect you, the buyer, and your house and possessions. You pay an insurance premium based on the policy you purchase to a provider that’s a completely separate entity from your mortgage lender. That monthly fee to your insurance provider covers any damages if something bad happens to your home.
There are many types of homeowners insurance. But here are a few to know about.
- Dwelling: This covers your home from certain natural damage like hail and wind.
- Personal property: This coverage protects your possessions. Think your home, furniture, and personal effects.
- Liability: If someone is injured on your property, this coverage protects you against a lawsuit.
- Additional living expense: This coverage assists with temporary living accommodations if your home is not suitable to inhabit.
You may also hear about mortgage hazard insurance when you start the mortgage process. It’s related to your homeowners insurance policy, however, and not your mortgage. It’s the portion of your home insurance coverage that protects your home and physical possessions.
Your lender may require a certain amount of hazard insurance to protect their interest in your property. If something catastrophic happens to your home, the hazard insurance will protect it
When it comes to homeowners insurance costs, that’s based on a variety of factors — like the value of your home, your possessions, and what it would cost to rebuild your home after severe damage.
Mortgage Insurance vs. Homeowners Insurance: Key Takeaways
Now you know the basic big differences between mortgage insurance vs. homeowners insurance. If you’re still puzzled by who needs one or the other or both, we have the answers.
Who Needs Mortgage Insurance?
Not all home-buyers who apply for and receive a mortgage also need mortgage insurance. If you’re paying less than a 20% down payment on a house, then you’ll definitely need to purchase mortgage insurance.
Why do you have to foot the bill for this coverage? Loaning to you is considered high risk since you’re putting down a lower down payment. And mortgage insurance protects your lender in case you can’t pay them back.
If you were to pay 20% or more of the full cost of the house you want to purchase, you would not be required to purchase mortgage insurance.
Who Needs Homeowners Insurance?
If you’re able to put more than 5% down or even pay in full, then you won’t need primary mortgage insurance. You won’t need homeowners insurance either. But you may want to purchase homeowners insurance anyway.
Unlike fire insurance, homeowners insurance isn’t mandatory in Canada. Still, purchasing even a basic policy could protect you from the unknown.
While many Canadians do opt for homeowners insurance, studies show that most don’t have flood insurance. This kind of coverage is slowly becoming available as a part of home insurance policies. And it may be more important for more people to have with increased flooding.
Who Needs Both Homeowners and Mortgage Insurance?
If you’re putting less than 20% down on a home, and as little as 5%, you’ll probably need homeowners insurance too. This is another measure to help the lender protect itself by ensuring that damages will be covered if your house is destroyed.
There is one area where there is an overlap in mortgage insurance vs. homeowners insurance. Homeowners insurance can protect both you and your lender.
Say you’re in a financial bind at the time of a disaster that ravages your house. You have no place to live and no way to make your mortgage payments.
If you have the necessary homeowners insurance, the lender could still recoup the loss if a natural disaster destroys your home. They could take the property back and sell it.
If you weren’t insured, they wouldn’t have this ability. Plus, you would be stuck shelling out mortgage payments even if your house is leveled by a storm.
While homeowners insurance is a separate buying process, your lender may require you to purchase it before agreeing to loan to you. In that way, both are linked to acquiring a home if you fall into the category of needing both types of insurance.
Which One Do You Need?
Now that you’ve had a side-by-side look at the most important differences between mortgage insurance vs. homeowners insurance, you may be wondering what’s best for your financial situation.
If you’re a first-time, prospective home-buyer deciding on how much you can put down, we can help you anticipate how much your mortgage costs may be. Or if you think you fall in the boat of needing both types of insurance, we can walk you through the important things to consider when shopping for coverage.
And if you’d like to learn about all the various types of mortgage and homeowners insurance, you’ve come to the right place. We can help you get a quote today on affordable homeowners and mortgage insurance in Canada.