Insured Mortgage
Mortgage Insurance
What's the Difference?

The question regarding the difference between an insured mortgage and mortgage insurance has confused many a new (and seasoned) buyer.

The fundamental difference between the two terms is that an ...

Insured Mortgage Protects the Lender

... against loss due to default by a borrower (mortgagor), whereas ...

Mortgage Insurance Protects the Borrower

... or more precisely the surviving borrower, against the loss of life of the insured. So, it's just mortgage life insurance.

When the funds requested by a borrower, which will be registered as a mortgage loan secured on title to the property, exceed a certain percentage of the purchase price, the lender will insist that the loan be insured against loss in the event the borrower defaults, or fails to fulfill their contractual obligations contained in the mortgage document.

In Canada, this type of mortgage is referred to as a ...

High Ratio Mortgage

So, if your down payment is less than 20% of the purchase price (which should equal the appraised value), your mortgage will be insured in this way.

If you miss a payment, the lender has the right to commence proceedings to collect what is owed to them. In Canada, this is accomplished usually by way of what is called 'power of sale' or 'foreclosure'. The lender secures possession of the property and sells it after you've been evicted.

Typically, lenders are somewhat forgiving, at least for a little while. Depending upon their company policies, as well as the history of your relationship with them, they may provide you with an opportunity to skip a payment, or to redeem yourself. Of course, interest would still accumulate.

There's no free lunch involved.

Mortgage insurance, on the other hand, is simply life insurance. If a couple buys a house together, and one meets their unfortunate end, this type of policy would usually provide the funds to pay off any outstanding balance on the mortgage. Thus, the survivor would own the property free and clear of that mortgage.

Premiums can be higher than those for a straight term insurance policy, but the policies are usually easier to obtain. Unlike term insurance, which would normally maintain the same amount of insurance throughout the term, a mortgage life insurance policy payout entitlement decreases with the outstanding balance of the mortgage debt. However, the premium would remain constant for the term of the policy.

And in both cases ...

The Borrower Pays the Premium

For an insured mortgage protecting the lender, the premium is paid up front, and is usually added onto the mortgage principle and amortized over the life of the mortgage. Life insurance premiums are usually payable on a monthly or annual basis.

So, mortgage insurance and insured mortgage
- similar terms, but completely different purpose.

Visit Canada Mortgage and Housing Corporation (CMHC) to learn a little more about mortgage insurance.

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