Congratulations! If you are reading this you either just purchased a home or are going too soon. When you finalize the paperwork with your mortgage lender (bank or broker), and your home is days away from possession, the bank will offer, no wait, pressure you, to get mortgage insurance.
What is mortgage insurance?
Mortgage insurance protects you in the event of you or your spouse’s death. In other words, the insurance will pay off your mortgage and you, your partner, your children, or your estate, will be mortgage free.
Sounds like a great deal, especially if you have children. But what your mortgage lender will never tell you is that the benefit of having mortgage insurance decreases over time because as you make mortgage payments, you are paying down the principal.
Looking at the picture above, you can see the annual mortgage payments on a $450 000 loan over 25 years. The way mortgage insurance works is that at any point you or your partner die over the life of your mortgage, the insurance will pay off your mortgage. The longer you live, the less insurance will payout.
Mortgage insurance premiums stay the same for the life of the mortgage. When the bank offered us mortgage insurance for our home, the premiums were $70/month on a $240 000 mortgage. The monthly fee seemed small at first.
You just borrowed the most amount of money you have ever borrowed, and you want to protect your biggest liability. If you tell the bank you aren’t interested, they will tell you a story about one of their ‘clients’ who declined mortgage insurance, one member of the couple died, and their family was left destitute.
When you go to sign your mortgage with the bank, they pressure you to get mortgage insurance. Mortgage insurance is more expensive because there are no medical tests that need to be done.
For this reason, they are higher risk coverage. In Canada, the lender can’t force you to purchase mortgage insurance. Mortgage insurance is a great deal for the bank but you should avoid purchasing it if you can.
What’s the alternative?
The best alternative in my opinion is to get term life insurance. Term life insurance is similar to mortgage insurance in that your premiums remain the same for the life of the term you purchase.
But the differences are that your term life insurance will pay the same amount whether you die in the first year of the policy or the last. Term life insurance is also not attached to your house so if you sell your house, you are still covered in the event of your death.
Note: Mortgage insurance is different from house and mortgage loan insurance.
Caveat: you need insurance especially if you are just starting out on your FI journey (building assets)
Mortage insurance costs more because you don’t usually need a medical assessment. Therefore it is a riskier loan for the bank to make.
Banks and mortgage brokers will never present all the pros and cons of mortgage insurance to you. They will only ever present you with the pros served up with a side of fear.
When is it good to buy mortgage insurance?
It’s always a good idea to protect your family assets. If you are considering mortgage insurance, look into term life insurance before you commit. A healthy young adult should have no problem getting term life insurance that covers more than a mortgage. But you don’t want too much life insurance, otherwise your partner will start getting ideas.