Understanding Insured Mortgage: Your Complete Guide to Mortgage Protection in Canada

A lot of times people think they have everything figured out when they buy their first home. They'd saved up, found a great house, and got pre-approved for a mortgage. But then the loan officer starts throwing around terms like ‘insured mortgage,’ ‘insured vs. uninsured mortgage,’ and ‘mortgage protection insurance,’ and they have no clue what any of it means.

Sound familiar? You're not alone. Most people stumble through the mortgage process without really understanding what they're signing up for. Today, we’re going to break down everything about insured mortgages in simple words with no fancy jargon and no confusing technical terms.

What Is an Insured Mortgage?

When someone says ‘insured mortgage’ they could mean a few different things. It's like saying a car is red, it could be any model, it could be a sedan, it could be a sports car, it could be a truck. The color doesn't tell you everything.

Most of the time, we're talking about a mortgage that comes with some kind of insurance attached. Sometimes it's insurance that protects the bank. Other times, it's insurance that actually protects you and your family.

Buying our first home or a new property is an exciting milestone but saving for the 20% down payment can take a long time. An insured mortgage helps make things easier. It allows you to pay a 5% to 15% down payment making it quicker to get into your new house but it comes with a premium.

In Canada, an insured mortgage is required if you put down less than 20% on your house. Federal insurers like CMHC and private insurers, protect the lender from the risk of foreclosure. You pay the premium in exchange for access to mortgage financing that might otherwise be out of reach.

Home Loans Mortgage Insurance

Home loan mortgage insurance lowers the risk to the lender of making a loan to you. When you put down less than 20%, the banks get nervous because if you default on your loan, they will have to foreclose and they might not get their money back.

This is where home loan mortgage insurance comes in. You pay a monthly fee depending on the size of your loan and if you can’t pay your mortgage, the insurance company will reimburse the bank for part of their loss.

This insurance doesn’t help you keep your house if you lose your job and can’t make payments, it just makes sure the bank doesn’t lose money when they take your house away. But it’s also what makes it possible for people to buy houses with just 3% to 5% of a down payment instead of waiting years to save up 20%.

Here’s how the home loans mortgage insurance works:

• You make a down payment of 5% to 19.99%.
• The lender orders insurance from CMHC or private insurers.
• A premium is added to your mortgage or paid upfront. The premium usually ranges from 2.4% to 4.5%.
• The lender is protected if you default.

If you’re buying a house worth $500,000 with just a 5% down payment, the default insurance premium will be around 4% or $19,000, which will be spread across your mortgage, with no lump-sum payment required at closing.

What is Mortgage Protection Insurance?

Mortgage Protection Insurance (MPI) is designed to help you and your family. It’s optional insurance purchased to cover your mortgage payments in case something happens to you, you lose your job, or in case you pass away.

Some policies will make your monthly payments for a while if you're unemployed or disabled. While others will pay off your entire mortgage if you die. It ensures your home remains secure and your family isn’t burdened with mortgage payments.

But the catch is that this insurance can be expensive. And the coverage usually decreases over time as you pay down your mortgage. So you might pay the same premium for 20 years, but the benefit keeps shrinking.

Mortgage Insurance vs. Life Insurance

This is where a lot of people get really confused and you can’t really blame them. If someone sells you ‘mortgage protection insurance’ you are bound to think it’s great and you are covered. But then you find out regular life insurance might be a better deal.

The difference is that life insurance pays your beneficiaries a lump sum. They can use it for anything such as paying off the mortgage or to pay for groceries, keep the kids in college, or take a vacation to deal with grief. It's their money to do with as they choose.

Mortgage protection insurance is more limited. It's specifically for your mortgage. If you die, it pays off the loan. Your family doesn't get cash, they just get a house with no mortgage payment.

Which is Better?

This depends on your needs and requirements. Life insurance is usually cheaper and more flexible. A healthy 35-year-old might pay $30 a month for $300,000 in term life insurance. That same person might pay $40 a month for mortgage protection insurance that starts at $300,000 but decreases every year.

But if you have health problems, mortgage protection insurance might be easier to get. Some policies don't require medical exams or extensive health questions.

Insured Mortgage in Canada

The insured mortgage cap has been raised from $1 million to $1.5 million as the Canadian government announced one of the boldest mortgage reforms in a decade in 2024, making down payments and monthly mortgages more affordable. 

The new reform allows more buyers access to a 5% down payment. It is an especially important update for high-cost regions like Ontario.

First-time buyers and newly built home purchasers may now qualify for 30-year amortizations which reduces the monthly payments although it costs slightly more.

Making Smart Mortgage Choices

Don’t just accept whatever insurance is offered to you by lenders. An insured mortgage is a great choice as it empowers you to purchase with a lower down payment but it’s not the right choice for everyone.

It’s best to ask questions, get multiple quotes, and weigh all factors like premium costs, long-term financial plans, and whether MPI or term life insurance better fits your needs.

If you're getting a conventional loan and paying Private Mortgage Insurance, find out exactly when you can cancel it. Mark it on your calendar. Set a reminder. Oftentimes, people pay PMI for years after they could have canceled it just because they forgot or didn't know they could.

If you're considering mortgage protection insurance, get quotes for term life insurance first. In most cases, life insurance gives you more value for your money. But if you're older or have health issues, mortgage protection might be your only option.

Also, keep in mind that you don't have to decide everything right now. You can get the house with whatever insurance is required, then shop for better coverage later after you’ve done your research and made an informed decision.

Get Professional Advice

Mortgage insurance is often unavoidable if you're not putting down the required 20% down payment. But there’s a way to deal with it without stress, just factor it into your monthly budget and plan to get rid of it when you can.

Mortgage protection insurance can be worth it in specific situations but shop around first. Compare it to life insurance. Maybe you need both, maybe you need neither, or maybe you need something in between.

The most important thing? Don't let anyone pressure you into making a decision on the spot. Take the paperwork home. Sleep on it. Talk to people you trust. Get professional advice. This is probably the biggest financial decision you'll make so treat it like one.

We specialize in guiding Canadian homebuyers through mortgage financing and insurance options. We'll help you compare premiums, explore amortization, and ensure you’re well-informed. Our real goal is to make sure you are making an informed decision that you can live with.

Ready to discover your mortgage options? Contact us for a personalized chat and take the next step toward owning your dream home.