While they both offer peace of mind with different aspects of your house, home insurance and mortgage insurance are very different types of insurance that address different insurance needs.
One protects you and your lender from defaulting on your mortgage, and the other covers the physical structure of your home.
If you’re confused between the two, read on to learn more about the differences of these two crucial pieces of insurance and how they can protect you in the event of a crisis.
Mortgage insurance is insurance that covers the dollar amount of your mortgage, in the case of a default. If you were to die or become seriously ill and unable to pay your mortgage, mortgage insurance would protect the lender and pay off the remaining balance of your mortgage.
In Canada, every home over $500,000 that is purchased with less than a 20% down payment is required to carry mortgage insurance. The majority of this insurance coverage is provided by the Canadian Mortgage and Housing Corporation (CMHC).
Mortgage loan insurance is not available for homes that cost $1,000,000 or more, since homes at that range already require a minimum 20% down payment.
In 2022, approximately 64,266 housing units in Canada were insured, including 16% of rural homes. This represents a total of $179 billions in insurance-in-force.
Typically, the cost of this insurance (or the mortgage insurance premiums), is paid by the lender, who will then pass on the cost to the mortgage-holder by rolling it into their monthly mortgage payment.
Mortgage insurance allows people with limited savings to buy a home earlier by guaranteeing the full amount of the mortgage. This way, the lenders essentially carry no additional risk that the homeowner will default on the loan as a result of injury or death. It supports both lenders and borrowers during times of financial crises, when risk of defaults is much higher.
Moreover, buying a home without mortgage insurance requires a much larger down payment, which many people may not have at their disposal or would have to save for several more years to acquire.
Mortgage insurance allows you to buy a home with a down payment of as little as 5% for homes valued below $500,000, which can allow first time home buyers to get their start on the property ladder.
Home insurance, on the other hand is insurance that you buy to cover the replacement cost of your home — that is, your physical dwelling — should it be damaged by fire or other accidents. Home insurance also covers the replacement cost of your belongings should they be damaged or stolen.
There are several different home insurance coverage types.
Comprehensive home insurance
This type of insurance covers your home and its contents for all risks that are insurable. The exception would be certain natural disasters that are uninsurable.
This is also known as named perils insurance since it allows you to specify the types of hazards you want the insurance to cover. This is a cheaper option, but also results in lower levels of coverage, leaving you vulnerable to losses that are not specifically mentioned in the policy. This type of coverage may be appropriate for a cottage or other vacation property.
Read more: 7 ways to save on your home insurance
This type of insurance is a combination of comprehensive and basic coverage. For example, a homeowner may have comprehensive coverage on the building itself and basic coverage on their belongings.
No frills coverage
This is a plan for properties that are otherwise uninsurable, usually due to a problem with the physical structure of the building. This might include a barn or other structure that doesn't meet current building code requirements.
The purpose of home insurance is to protect the homeowner. Home insurance protects the homeowner against loss-of-use of the home, or the personal belongings contained in the home, depending on the type of home insurance chosen and the level of coverage specified in the policy.specified in the policy.
Meanwhile, mortgage insurance protects lenders in the event of a borrower defaulting on their mortgage, while allowing borrowers to put down less as down payment than the 20% otherwise required.
A home is much more than a house: It’s a place where most of someone’s daily life unfolds and is one of the biggest purchases they’ll make in their life. For those reasons, a home should be as insured against risk as possible. Both mortgage insurance and home insurance are crucial to helping with that.