What is Mortgage Insurance?

Our Perils of Mortgage Life Insurance Comic: No Laughing Matter
click the link to read the whole comic

Sounds great just lying there on paper, doesn't it?

Really solid.

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 which declines in value as you continue to pay.

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 $3560/month. Rent: $2500.

You are leaving over $1000 in your pocket per month in ready money. That's a lot of restaurants and vacations twelve months year.

But let's take it ten years later:

Year 2020: Mortgage payment $3560/month. Rental $3301.
And you have no equity in the house.

Year 2030: Mortgage payment $0. Rent: $4501.

So in most cases, buying a house is a great deal long term, even with the high mortgage payments. How does mortgage insurance compare with home ownership as an investment?

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. All most of them really know that they get a nice bonus based on how many of these mortgage insurance contracts they close.

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

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 your 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 CBC covered 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.

Would you like to replay the video or share the link to it with your friends?

Trailer for CBC Marketplace In Denial: Investigating Mortgage Life Insurance

For more on what CBC Marketplace found out about Mortgage Insurance Denial. Careful before you click that link. What you will read on the other side is heartbreaking.

What's hard to believe is that over 50,000 Canadians are living with mortgage insurance underwritten after death. That's 50,000 families living at risk of ending up homeless.