Area of Law: Insurance Law
Answer Number: 822
Home and mortgage insuranceRegion: Ontario Answer Number: 822
Home insurance is generally designed to protect you from losses resulting from damage caused by events that are difficult to predict or prevent. Unlike standard automobile insurance policies, there is no standard home insurance policy. Policies can vary widely depending on the insurance company and the type of coverage desired.
However, most policies of home insurance, as well as tenant and condominium insurance, also provide coverage for your legal liability to others because of bodily injury and property damage unintentionally caused by you and other members of your household.
Types of home insurance
There are generally three main types of home insurance available.
1. Comprehensive insurance. This type of insurance will cover your home and its contents for all risks, except for any that are specifically excluded in the policy.
2. Basic or Named Perils insurance. This will cover your home and its contents for only the specific risks that are listed in the policy, and will generally be cheaper than comprehensive coverage.
3. Broad insurance. This type of policy generally provides more coverage than the Basic or Named Perils policy, but less than the Comprehensive policy. With Broad coverage, you obtain Comprehensive coverage for your house and Basic or Named Perils coverage on its contents.
Although home insurance usually covers the contents of your home, you may require extra coverage, or your coverage may be limited if you own special or expensive property such as jewelry, antiques, or art work. Talk to your insurance company or broker for information on whether your expensive or special items are covered in your policy. Without the proper coverage, you may not be compensated in the event of a loss.
If you own a condominium unit, you can purchase condominium insurance to protect you against loss or damage to your unit and its contents. Specifically, a condominium insurance policy typically covers:
- Personal property such as clothing, furniture and appliances, as well as items stored in your locker,
- Additional living expenses, over and above the normal cost of living, in the event of an insured loss,
- Personal liability for any bodily injury or property damage unintentionally caused to others, and
- Upgrades to your unit made by you and previous owners, such as custom flooring or countertops, etc.
It also protects you if you cause damage to common areas of the building. Without condominium insurance, you could be held financially responsible if you cause damage to areas such as the lobby, swimming pool, and parking garage.
Tenant insurance for renters
If you rent your home, whether it be an apartment, condominium or house, you can buy tenant insurance. Tenant insurance generally includes two kinds of coverage:
- Contents coverage protects the contents of your apartment, such as furniture, clothing and electronic equipment, and replaces your belongings if they are lost or damaged.
- Basic Liability coverage will protect you, if you or your guests accidentally damage the apartment unit itself, or the whole building. For example, if you or your property is the cause of a fire that results in extensive damage to the building, and you do not have this coverage, you may be required to pay for the cost of repairs which should be covered under your policy.
Many landlords require that their tenants purchase tenant insurance and provide them with a copy of the policy before renting to them, or renewing their lease.
Reducing the cost of home insurance
You may be able to reduce the amount of money you are paying for home insurance in several ways.
1. Discounts for installing smoke alarms, sprinkler systems, or home security systems.
2. Discounts for long-time customers who have been loyal to a particular insurance company, or for customers who have both their vehicle insurance and their home insurance with the same insurance company.
3. Increase the amount of your deductible. Your deductible is an amount of money you must pay toward the total cost of the damage or loss. The higher the deductible, the less the insurance company has to pay, so they can offer you lower insurance premiums.
4. Regularly calculate the value of the items you are insuring to avoid paying for more insurance than you actually need. However, in many cases, people are underinsured because they do not properly re-calculate the replacement cost of insured items.
5. Discounts are often available for non-smokers because the risk of fires is reduced.
6. Discounts for seniors are offered by many insurance companies.
Mortgage loan insurance
Mortgage insurance gives lenders greater protection from the risk of home buyers who become unable to repay their mortgage loan. If you are considering purchasing a home with less than a 20% down payment, your lender will require you to arrange the necessary mortgage insurance, commonly called “mortgage default insurance” or “mortgage loan insurance”.
A mortgage with less than a 20% down payment is considered to be a high-ratio mortgage, and in this case, mortgage loan insurance is only available where the purchase price of a home is less than $1 million. The maximum amortization period, that is, the length of time it takes to pay off a mortgage in full, is 25 years for mortgages with mortgage loan insurance.
Who qualifies for mortgage loan insurance?
There are a number of general requirements to qualify for mortgage loan insurance. In addition to making the required down payment (of at least 5%-10% of the purchase price of the home), most insurers require that:
- the home is located in Canada,
- the purchase price is less than $1 million,
- the home is used for full-time personal occupancy,
- total monthly housing costs (GDS), including mortgage payments and property taxes do not exceed 39% of gross monthly income,
- total debt load (TDS), which includes total monthly housing costs plus other debts, such as credit card payments or car payments, shouldn’t be more than 44% of gross household income,
- the buyer’s credit rating score is a minimum 600, and
- the buyer has proof of income to ensure that they can service the loan.
The lender may also have additional requirements, such as an appraisal of the value of the home, and an insurance application fee.
How much does mortgage loan insurance cost?
The cost of mortgage insurance can vary depending on the amount of the down payment: the bigger the down payment, the lower the mortgage loan insurance premium. Generally, the cost of the insurance ranges from 0.6% to 3.6% of the amount of your mortgage. You can pay the premium in one lump-sum payment to avoid interest costs, or it can be added to your mortgage and paid off as a regular part of your mortgage payments. Provincial tax (HST, GST) on the cost of the insurance premiums, however, must be paid at the time the insurance is purchased.
For more information on mortgages, visit the Real Estate Law section of Legal Line
Mortgage Rate Stress Test
In January 2018, the Government of Canada’ s Office of the Superintendent of Financial Institutions (OSFI) amended the mortgage rules introduced in 2016 that require Canadian home buyers to take a mortgage stress test to qualify for a mortgage at a bank. Previously, this test was only required to approve buyers who had a down payment of less than 20% and required mortgage loan insurance. Now all buyers, including those with a down payment greater than 20% who do not require the default loan insurance must take a mortgage stress test.
The stress test is applied at the time of the mortgage loan insurance application. It is conducted to ensure that the home buyer could still afford the mortgage if interest rates were to rise. For more information on the mortgage stress test, view What mortgage loan amount can you qualify for? Stress Test.
Your lawyer, real estate agent or financial institution can provide you with additional information about mortgage insurance. You can also contact the mortgage insurance companies directly, or visit Canada Mortgage and Housing Corporation.
For more information about home insurance, contact an insurance broker or refer to the Insurance Bureau of Canada website.
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