Purchasing real estate is a very important event in the life of any family residing in Canada, especially if they buy their first home. Realtor, a specialist in selling real estate, may help you in many questions, which arise when you buy a home. He can give you many good tips in this area. I would like to touch upon a question, which is sometimes neglected by the time of contract signing. I mean Mortgage Insurance.

When you buy real estate, you will come across 2 types of Mortgage Insurance:

• Mortgage Insurance in case of low down payment ;
• Individual Mortgage Insurance at the bank; such kind of contract is signed with the bank at the time of getting the loan;

Let us look closer at each type of insurance.

We must have government insurance if our down payment is less than 20% of the cost of the house we are buying. If our down payment is low, no bank will agree to give us a loan, if it is not insured with the Canadian Companies, such as CMHC (Canada Mortgage and House Corporation), or Genworth Financial Canada, or AIG United Guaranty Mortgage Insurance Canada. The price of insurance depends on a down payment. For example, if down payment is 5%, then the government insurance is 2.75% of the sum of the loan, with 10% down payment it is 2%, and with 15% down payment it is 1.75%. These figures are correct in case the amortization period is 25 years. For amortization ptriods of 30, 35 and 40 years the figures are different. This kind of insurance works the following way: if we do not pay the bank our monthly installments, the bank has the right to sell our home and return itself the sum of money, which we borrowed from it. It is possible, that the house will be sold at a lower price. In this case the government mortgage insurance starts to work. The difference will be paid to the bank by, for example, CMHC. Important conclusion - government insurance does not protect your family, it protects the bank! But there is no way to escape it!

You could increase down payment. If the down payment is 10%, then the government insurance will be 2.5%. Accordingly the ratio of down payment and insurance will be: up to 15% - 2.0%; up to 20% - 1.25%; up to 25% - 0.75%; up to 35% - 0.5%. The bank has a right not to ask for insurance with CMHC if down payment is 25%, but at the decision of the bank this kind of insurance may be demanded even if down payment is 35%. However, even 25% are a big sum of money. It is hard to save money (the more you make, the more you spend) and you need your home soon (you do not want to waste money on rent or your parents whom you sponsor for immigration are arriving soon). That is why we sign contracts to our disadvantage. But what can we do? Life is like that.

The second type of insurance comes into our sight when we are signing the contract. When we are about to sign the contract, bank manager asks:

"If you want to protect your family in case of death or serious illness resulting with disability, dismemberment of any of the spouses, so that all the rest of the mortgage will be paid, please tick off here." No one wants to leave his or her family with debts after death. Of course, it is important to protect them! And it looks like the wording is correct and this is what we need! Of course, we are buying such insurance - decides the family. And you are right, it is important to protect your family. But there is a different opportunity to protect the family more advantageously than it is done in the bank. We talk here about Life Insurance.

Let us look at the examples, showing us why 2 individual kinds of insurance work better than one Bank Insurance:

1. The heir in the bank insurance is YOUR BANK, and in the individual insurance is YOUR FAMILY. It means, that in case of death of any of the spouses the family, which has Bank Insurance, will have no cash, because the money will cover the rest of the mortgage. But the family need money today - to cover funeral expenses ($10,000-$12,000), to cover all other expenses connected with the death of the person, (9-th, 40-th memorial days, air tickets for relatives, some reserve money to help widow/widower, who maybe does not work at the moment, recover after grief, etc.), to cover monthly expenses and pay bills. If the family has no money for living, it makes no difference how much they need if there is no money. In individual type of insurance ALL THE SUM is paid to the family without being taxed, i.e. the family will always have cash, which they can spend the way they decide: to cover the mortgage, and keep the rest to live on; or to keep all the money, earn interest and pay mortgage with monthly installments. Look at the situation of the family, which has minors and the parents die in car accident (we have to look at all kinds of situations when we think to sign insurance contract). If the family has Bank Insurance and the children are left with no cash - it is financial catastrophe! They must pay all the bills. Can you imagine, how it is going to look in practice? But in case of 2 kinds of Individual Insurance, as heirs they receive the sum, which is twice as big and tax free; it gives them an opportunity to deal with mortgage and to sponsor their relatives for immigration to be their guardians, etc. 

2. In most cases your two individual kinds of Life Insurance will cost less than one Bank Insurance (depending upon the type of insurance).

Your Bank Insurance consists of Life Insurance, Terminal Disability Insurance and Dismemberment Insurance (quotation is taken from TD-Bank description. Insurance policy with other banks may have slight differences). Life Insurance - is purchased for the case of death. Terminal Disability is not the kind of insurance for the case of critical illness and compensation. This kind of insurance works in case the doctor diagnoses such serious illness, that the patient has no more than a year to live. Who can get such diagnose? Any doctor will do his or her best to treat the illness, and who knows what the result may be? Dismemberment - is loss of members of the body (two limbs), hearing, speech, etc. Such cases are quite rare, at the same time in most cases we get free insurance of this kind at work. Because of all these reasons Mortgage Insurance costs more than Life Insurance.

3. You are the owner of insurance contract:

• none can break your contract; it can be very important if you transfer the Mortgage from one bank to another (in case of serious illness you may be refused the insurance);
• You have the right to change your contract in accordance with your desires: get temporary, permanent, universal kinds of insurance or combine different kinds of insurance; you can include 2 and more persons in the contract; you may add the insurance for critical illness and other details; you may assign anyone as your heir.

We listed the reasons why Individual Insurance works better for the family than Bank Insurance. If you already bought your home, please, check your contracts to see if you have Mortgage Insurance. It often happens so, that people do not remember this detail and cannot distinguish from the monthly bills what they pay for (the bank includes mortgage payments, property tax and insurance into one bill). You have the right to refuse from this kind of insurance at any time, at the moment of signing the contract or at any time after purchasing your home. But you should do it only if you want to change one kind of insurance for another kind. It is unsafe to stay without insurance at all. 

By the way, I hope you have not forgotten about RRSP. This is a program, which will help you to save 30% more money for your down payment, than you ever thought (depending upon your annual income). Your money must stay in an RRSP account for minimum 3 months, which means that you should get ready to buy your home in advance.

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