The homebuyer’s guide to insurance

Welcome to the first part of the home-buying process—the part where you Google “how to buy a house” because for some reason they don’t teach you this kind of stuff in school. 

This is an exciting time in your life, and we want to make sure that when you’re going through this process for the first time, you don’t get overwhelmed with on-the-stop offers for this insurance product or that finance deal. In this guide, we’ll walk you through insurance products we think will set you up for success when making one of the biggest purchases of your lifetime! 

Step 1 – Get mortgage pre-approval

Before you even start dream clicking through realtor.com, you should go to your bank or a mortgage broker to get pre-approval. This pre-approval process will take your credit score, liabilities (your debt), your income, your job security, and other factors to tell you how much a lender will approve you for when you go through with applying for a mortgage. They’ll give you a budget to work with when you start looking—this way, you don’t put an offer on your dream house and then later find out you can’t afford the mortgage on it and lose it.

Step 2 – Get shopping!

This is the fun part! It’s where you find a real estate agent and start going to open houses. Your real estate agent will help you through the process of finding a house, making an offer, and choosing conditions, so we won’t get into the nitty-gritty of that here. But one thing to make sure to add to your conditions list on your offer deal is a home inspection. Trust us, you’ll thank us later.

Step 3 – How does a mortgage work?

After your offer on the house is accepted and the conditions of the offer (such as a passing home inspection or completion of outstanding renovations), if any, are met, the deal is sent off to the bank/lender to approve your mortgage. A mortgage is a financial contract between you and the lender (usually a bank). It’s an agreement that they will lend you the money (minus the down payment) to pay the house and you will pay them back over a set amount of time.

The lender may have specific terms they need to be met in order to lend you the money to buy this house. It may mean a certain amount of money for a down payment, mortgage insurance, mortgage default insurance, title insurance, or proof of home insurance. Sometimes these are deal-breaking requirements and sometimes these are just product pushes that you may not actually need.

Let’s cover the basics of what your lender may require or ask for, so when they ask you, you don’t have to panic buy your way into insurance you may or may not need.

What is mortgage insurance?

This is the cross-sell that your mortgage banker is being incentivized to unleash on an unsuspecting home buyer. In the event that you pass away, mortgage insurance will pay off the remainder of the loan. That sounds like a prudent objective. What could be wrong? Well, for starters the amount of mortgage insurance coverage decreases as you pay off the loan, and the payout can only be used towards the loan—nothing else. The premium you pay for this insurance does not decrease as the coverage amount decreases. This insurance can be expensive. Additionally, if you port the loan because you found a better deal, the insurance will be cancelled. The lender may make mortgage insurance seem like it’s a requirement, but it is not.

Do you need it: No. You can choose better options for financial protection (see step 4).

What is mortgage default insurance or CMHC insurance?

While mortgage insurance isn’t mandatory, mortgage default insurance may be, depending on your circumstances. In Canada, if your downpayment is less than 20% of the purchase price of the house and the house is worth less than $1 million dollars, you NEED mortgage default insurance. This insurance will make your mortgage payments when you cannot (not only due to death but for other reasons as well). It’s the lender’s reassurance that if you can’t make the payments, the insurance will. This coverage helps many first-time homebuyers (and others choosing a smaller downpayment) get a mortgage, because the insurance makes the bank feel confident the mortgage payments will get made one way or another. Mortgage default insurance is offered by providers such as the Canada Mortgage and Housing Corporation (CMHC), a crown corporation, or private mortgage insurers like Genworth Financial Canada and Canada Guaranty.

To learn more about how mortgage default insurance works and how much it costs when your downpayment is less than 20 percent, head to our CMHC Mortgage Default Insurance Calculator.

Do you need it: Maybe—if your down payment is less than 20% of the purchase price. 

What is title insurance?

When you buy a house, a transfer of title takes place. A title is proof that you own the property. Title insurance protects you from any financial loss you may take on as a result of title errors and the legal cost to get them fixed. Coverage may include errors in the documents, pre-existing liens (the previous owners didn’t settle their mortgage), fraud (someone steals your identity and sells your house without you knowing), encroachments in your space (your neighbour built a deck on your land) among other clerical issues that may be expensive to sort out.  

Do you need it: Not mandatory. But it’s prudent to have it in place, especially if you don’t have a backup fund to any cover the legal expenses required (which can creep up into the hundreds or thousands) to get title issues straightened out. 

What is home insurance?

Home insurance is coverage for the actual house itself—the walls, roof, fence, garage, etc. Lenders need this insurance because it tells them “if the house burnt down, the insurance will pay off the mortgage.” You also want it to make sure that in the event of a tragedy like a fire, you won’t have to keep paying a mortgage on a house that doesn’t exist. Home insurance also includes liability insurance, meaning that if you get sued or cause damage to someone else’s property, they’ll likely cover the cost. It also may include bonuses like identity theft coverage depending on the provider. 

Do you need it: Yes, if you will have a mortgage. If you’re paying cash, it’s up to you, but bear in mind if something happens to the house it’s on you to repair or completely replace. 

Step 4 – Protect your asset

Congratulations! You’ve made it to the final step! You got all your paperwork in order before the closing date, the boxes are packed, the truck is rented and you’re all ready to move in! The process of purchasing a home and moving can be a lot of stress—but worthwhile to finally get your own piece of property. 

So, now that you have this beautiful home for you and your family to flourish—and a mortgage—let’s talk about your financial future. 

Your family may depend on you to pay for their cost of living including food, electricity, and mortgage or car payments either in part or in full. But you have to ask yourself: 

What would happen to my family if I passed away or got sick and could not support them? Well, if you had mortgage or mortgage default insurance, that may be your expensive and mostly inadequate solution. But what about the cost of living, funeral expenses, cost to retrofit your home for new disabilities, additional medical care… the list goes on. We can recommend a few insurance policies that can give you the peace of mind that the big mortgage you took out to buy your new house WON’T bankrupt your family.

What is life insurance?

Life insurance is an agreement between you and a life insurance company, where if you die, they will pay a death benefit: a lump sum of tax-free money to someone you choose. In exchange, you agree to periodically pay them an insurance premium: a small amount of money over time. This money can be spent how your beneficiary wishes and can be a better alternative to mortgage insurance as the coverage amount does not depreciate over time. With life insurance, your premiums are guaranteed for the entire coverage period, you can port your loan to any bank and your coverage continues, you can also designate the beneficiary you want rather than have all the money go to the bank. 

When is the best time to buy life insurance?

Right now! The younger and healthier you are, the less life insurance will cost. However, there are still great affordable options available for everyone. 

Read more about how life insurance works. 

What is disability insurance?

Disability insurance, sometimes also referred to as income protection insurance, is a product that offers you protection against loss of income by replacing a substantial portion of your paycheque if you become disabled. If you are a homeowner, disability insurance can help cover your monthly mortgage outstanding or other monthly expenses, should you become disabled, because of an illness or an accident. As compared to your lender’s coverage your own individual disability insurance will generally be cheaper, more customizable, and provide better coverage definitions. Your individually owned disability coverage has several advantages versus any disability coverage you may have at work.

Read more about how disability insurance works.

What is critical illness insurance?

Critical illness insurance is an agreement with a life insurance company that they will pay you a tax-free lump sum if you develop a life-threatening illness, health event, or undergo treatment while under their coverage. In the event of a diagnosis of a life-threatening illness, your individual critical illness cover can ensure a financial cushion for you to pay off your outstanding mortgage principal, use it for your treatment, or to meet other lifestyle needs. Your personally-owned critical illness insurance policy has more comprehensive coverage for illnesses, guaranteed premiums that stay constant over the chosen term, and the flexibility to port the loan. 

Read more about how critical illness insurance works.

Now that you know a few insurance products that may help secure your financial future after purchasing a house, we’d love to help find out which insurance policies would be best for you! Whether your first house is a tiny fixer-upper or a million-dollar condo in the sky, reach out to one of our advisors to chat about which options and policies are best for you.