Investing in Your Mortgage: Sensible or Senseless?

By Craig P Orser

Home ownership is a risky investment; with housing prices and household debt on a continuous rise. A mortgage may be the only real opportunity for the average Canadian to own a home, and that can put a huge financial strain on a family. As housing prices are projected to increase in the coming years, the risk to homeowners can only increase. While life insurance is a great way to ensure that your family will be able to settle your debts after your death, the sheer amount of debt a mortgage can incur cannot be practically paid off with a conventional policy. Banks and major insurance providers have been issuing mortgage insurance as a protection policy, but how effective is it when financing your debts?

Mortgage life insurance is an insurance policy provided often in conjunction with a loan that guarantees settlement of a mortgage loan in the event the policy holder dies, up to a pre-agreed settlement amount. Unlike traditional life insurance, mortgage insurance does not pay a benefit to the policy holder, but rather eliminates a debt between the policy holder and the loan provider, typically the bank.

The benefit of mortgage insurance is that the limits on what can be repaid are generally much higher than what normal life insurance offers, generally in excess of $500,000 to $750,000, with the ability to waive a medical exam if your loan is below a certain level. This insurance is also generally offered at much lower premiums than an equal amount in term life, allowing you to affordably settle your mortgage debt. It is typically offered alongside a mortgage loan with an incentive for this very reason.

There are some factors to keep in mind when deciding on a mortgage insurance plan that aren’t often readily apparent on the papers you sign. First of all: mortgage life insurance, contrary to other life insurance policies, will actually decline in value the longer you hold it rather than appreciate. While a major component of permanent life insurance is that you stand to gain in a coverage accumulation over the years; as your mortgage is paid off you can be guaranteed less benefit will result from a mortgage insurance. This is simply the reality of any insurance that covers one debt only. As there’s less debt to settle, there is less money allocated to pay it off. While your mortgage insurance provider may guarantee debt settlement up to a certain amount, the reality is you will likely see far less than the agreed limit.

Another thing to consider is the inflexibility of mortgage insurance compared to other policies, which offer a lump sum cash benefit in event of your death. With the inflexibility of this insurance, most insured will find it beneficial to take out a personal life insurance policy alongside a mortgage insurance. This can cover additional costs such as funeral arrangements or income replacement. While it can be beneficial and possibly less expensive to hold a personal life insurance and a mortgage life insurance policy together, it still requires considerable planning to understand your financial dependencies and allocate your benefits properly, even when taking your mortgage loan out of the equation.

Be mindful that under Canadian law, you are not required to purchase this form of insurance to qualify for a mortgage loan, and to be suggested otherwise is a form of coercive selling. Understand that the decision to purchase mortgage insurance is a decision only you can make, and take into account the value of your loan and estimate if mortgage insurance is the right investment on your home.

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