What is Mortgage Insurance and Do You Need It?

What is Mortgage Insurance and Do You Need It?

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Chances are, you’re using a bank-backed mortgage to buy your investment property. When it comes time to close your real estate transaction, you’ll face several choices. You’ll likely have to decide what lending products you need alongside the type of mortgage itself. Among them, mortgage insurance is one of the many ancillary products you may consider specifically for an investment property.

Table of Contents - What is Mortgage Insurance and Do You Need It?

It’s important to understand the costs and benefits associated with purchasing mortgage insurance for your investment.

A primer on mortgage insurance

There are three primary types of mortgage insurance you should be aware of: mortgage loan insurance, life insurance and illness and critical injury insurance. Depending on the specifics of your transaction, you might be required to buy mortgage insurance by your lender. Other types of mortgage insurance are optional but may be beneficial as well.

While you might not be required to buy mortgage insurance, it can provide peace of mind that your mortgage will be taken care of if you lose your job, suffer from a debilitating injury or die. Ultimately, your life circumstances will largely determine whether it should be a part of your investment strategy.

Mortgage loan insurance

This is probably the most common type of mortgage insurance. It’s also the most common type to be required by lenders.

If you pay less than 20 percent of the total purchase price as a down payment toward your investment asset, you’ll have to also purchase mortgage loan insurance. This insurance guarantees the lender will receive the balance of the loan back. Mortgage loan insurance primarily benefits the lender. However, it also allows investors and homebuyers to purchase properties with significantly smaller down payments.

You can buy a property with as little as three percent down when you agree to also purchase mortgage loan insurance. This can help you maintain liquidity even as you grow your investment portfolio. Once you’ve paid off a certain amount of your initial mortgage loan, you can drop the mortgage loan insurance policy. For this reason, mortgage loan insurance is a valuable tool for real estate investors hoping to rapidly increase the number of assets they hold.

Mortgage life insurance

Another type of mortgage insurance available in Canada is mortgage life insurance. While mortgage loan insurance is lender-oriented and often mandatory, mortgage life insurance is a consumer product.

If you have a spouse or dependent to maintain your real estate portfolio even after your death, mortgage life insurance will pay off the balance of the mortgage after you die.

Some general life insurance policies include some level of mortgage coverage, so make sure you check the details of your current life insurance policy before signing up for mortgage life insurance. Most general life insurance policies will only cover the cost of a single mortgage though. If you’re carrying multiple mortgages to be repaid at the time of your death, mortgage life insurance can be especially valuable.

It’s also worth noting, if your spouse or dependents don’t want to inherit your real estate portfolio after your death, they can always opt to sell properties back to the bank once you die. This means mortgage life insurance is often unnecessary unless they plan to take over your investment business.

Mortgage life insurance is never mandated, and it’s illegal in Canada for your lender to ask you to buy mortgage life insurance as a condition of your loan. This practice, called “coercive tied selling” is forbidden. Lenders are only allowed to require mortgage loan insurance.

Mortgage illness and critical injury insurance

If you suffer from a sudden debilitating illness or injury, you might find it difficult or impossible to keep up with your mortgage payments—especially if you’re paying down multiple investment properties.

Mortgage illness and critical injury insurance will pay off your lender if you suffer from a qualifying illness or injury. If you’re seriously hurt or sick, this might be especially beneficial. You can continue to run your real estate investment portfolio with minimal effort and no physical interaction. This means if you suffer from a serious injury or illness, your investment portfolio might be your best and most reliable source of income moving forward.

Your monthly premium is often based on both your age and the balance of your mortgage. Preexisting conditions are usually excluded from mortgage illness and critical injury insurance policies. Make sure you’re not purchasing a policy that excludes an illness you may already be suffering from.

If you’re in prime health and aren’t worried about suffering from any accidents, illness or critical injury, insurance may not be necessary for you. If you opt to purchase this type of policy, you’ll have to pay a monthly premium that could eat into your profits. At the end of the day, it’s up to you to determine whether a mortgage illness and critical injury insurance policy is a necessary part of your investment business.

Do you need mortgage insurance products?

The various types of mortgage insurance available are designed to protect both lenders and investors from possible cash flow loss due to job loss, illness and death. Whether certain forms of mortgage insurance are right for you depends on your circumstances and the circumstances of your family. Ask yourself, “am I covered in the event of the worst and are my investments handled accordingly?”

Talk to your lender to learn more about the different types of mortgage insurance policies you might benefit from. Also, consult with your spouse, children and other dependents to discuss their plans for your real estate investing business if you die. Finally, reach out to other investors in your area and ask if they have experience with specific mortgage insurance policies and products.

It’s okay to ask questions about mortgage insurance. Learning how it’ll benefit you as a safety net is an important part of determining if you need it and in what capacity. Once you learn, you’ll be able to apply that knowledge to any future investments.

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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.