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 this:
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.
When the funds requested by a borrower - registered as a mortgage loan secured on title to the property - exceed a certain percentage of the purchase price, it's standard lender policy that the loan must 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
If your down payment is less than 20% of the purchase price (which should be equal to or less than the lender appraised value), the 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 North America, this is accomplished usually by way of 'power-of-sale' or 'foreclosure'. The lender secures possession of the property and sells it after the occupants have been evicted from the premises.
Typically, lenders are somewhat forgiving, at least for a little while. Depending on their company policies, as well as the history of your relationship with them, they may grant a borrower the opportunity to skip a payment or to redeem themselves. Of course, since lenders are definitely not charitable organizations, interest would still accumulate and ultimately be payable by the borrower. There's no free lunch.
Mortgage insurance, on the other hand, is simply life insurance. If a couple buys a house together and one meets their unfortunate Earthly end, such a policy is designed to provide the funds necessary to pay off any outstanding mortgage loan balance. Thus, the survivor would own the property free and clear of that insured debt.
Premiums can be higher than those for a straight term insurance policy, but such policies offered through the lender are usually easier to obtain, with fewer restrictions. Unlike term insurance, which would normally maintain the same amount of insurance throughout the term, a mortgage life insurance policy payout entitlement decreases correspondingly with the decreasing outstanding balance of the mortgage debt. However, the premium remains constant for the term of the policy.
In both cases, the ...
Borrower Pays the Premium
For an insured mortgage protecting the lender, the entire premium is paid up front, added to the mortgage principle and amortized over the life of the mortgage. On the other hand, life insurance premiums are usually payable on a monthly or annual basis.
Similar terms, but completely different purpose
Visit Canada Mortgage and Housing Corporation (CMHC) to learn more.
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