By Chantal Marr, LSM Insurance
Special to the Financial Independence Hub
Sounds great just lying there on paper, doesn’t it?
The underlying concept of mortgage insurance is that if you die or are incapacitated mortgage insurance will pay off the rest of your mortgage. But be careful: Mortgage Insurance is the most dangerous financial product out there.
Mortgage insurance is the one financial product that declines in value as you continue to pay. Therefore each year you are getting less and less value for your premium.
Why Math is Important
Renting vs. Owning
Let’s start with your house. When you take a mortgage out on your house, it’s a very bad deal to start with. You are just paying interest on the value of the house and in most cases the interest far exceeds the cost of renting the same property.
Here’s an example based on a $500,000 20-year mortgage at 6% on a $600,000 house. We’ll assume rent inflation of 4%/year:
Year 2010: Mortgage payment $3,560/month. Rent: $2,500.
You are leaving over $1,000 in your pocket per month in ready money. That’s a lot of restaurants and vacations twelve months a year.
But let’s take it ten years later:
Year 2020: Mortgage payment $3,560/month. Rental $3,301.
And you have no equity in the house.
Year 2030: Mortgage payment $0. Rent: $4,501.
So in most cases, buying a house is a great deal in the long term, even with the high mortgage payments. How does mortgage insurance compare with home ownership as an investment?
Mortgage Insurance vs. Life Insurance
On that $500,000—as a 40-year old—you would be paying about $100/month for mortgage insurance (not including disability). For 20-year level term life insurance, you would pay about $60-$65 for that much coverage (non-smoker).
Let’s go through the years again:
Year 2010: Mortgage value $500,000. Mortgage insurance: $90/month.
Year 2010: Life Insurance value $500,000. Life insurance: $60/month.
Year 2020: Mortgage value $321,000. Mortgage insurance: $90/month.
Year 2020: Life Insurance value $500,000. Life insurance: $60/month.
Year 2029: Mortgage value $41,391. Mortgage insurance: $90/month.
Year 2029: Life Insurance value $500,000. Life insurance: $60/month.
So with term life insurance you pay two thirds as much for up to 10x as much coverage (depending on how far down the road you are).
How does that friendly banker look now? May as well paint fangs on him or her. But don’t be mad. In most cases, even mid-level loan officers have only a vague idea of how badly they are working to rip you off. What most of them know very well is that they get a nice bonus based on how many of these mortgage insurance contracts they close.
The Mechanics of Mortgage Insurance
So if mortgage insurance were actually sold in a fair way, it would just be a bad deal. But mortgage insurance is sold without qualifying the purchaser. After you claim, the insurance company steps in to compensate you, so that you can compensate the bank. That is, if you are lucky. Often, the bank does not really take good care to sign you up properly and the insurer may back out of the deal claiming that you (the client) have lied on the initial application form.
But wait, you say, the mortgage insurance was sold to me by my bank. Sold – yes, but backed – no. Mortgage insurance is an external financial product. Your bank will wash its hands of the affair immediately. They don’t want to know anything about it.
Don’t believe us? Think we’re just scaremongering to sell you life insurance? Think again. The CBCcovered the mortgage insurance scam indepth in their fabulous Marketplace Consumer Reports program. It might be funny, but it’s not. Lives are ruined.
Here’s a highlight of what awaits you.
(insert link to video: http://lsminsurance.ca/images/mortgage-insurance/all-you-qualified-for-to-pay-premiums-sound.mp4)
What’s hard to believe is that more than 50,000 Canadians are living with mortgage insurance underwritten after death. That’s 50,000 families living at risk of ending up homeless! Furthermore mortgage insurance through your bank is owned by your bank. The bank is beneficiary and the coverage is not portable. Meaning that if you sell your home or switch banks your coverage ends without value. If your health as subsequently changed obtaining new coverage may be expensive or unavailable.
Mortgage insurance is not required and must not be a prerequisite for qualifying for a mortgage.
That’s right, if a bank tried to force you to buy mortgage insurance (or discriminated against you if you did not buy it), your bank would be engaging in the illegal conduct of tied selling. Tied selling is explicitly forbidden by Section 459.1 of the Bank Act Canada. (Example of a bank’s tied selling prevention policy.)
This blog was originally posted on LSM Insurance and is republished on the Hub with permission. Chantal Marr is President of LSM Insurance, where she is in charge of product development. She has a B.A. from Laval University and Bachelor of Education from the University of Western Ontario. Chantal is a member of the Independent Financial Brokers of Canada, which gives her the flexibility to deal with all major insurance companies. She is fluent in both English and French. For more info on Chantal and others on the LSM Insurance team, click here.