Mortgage Insurance Explained & Navigating Divorce Challenges

Introduction (Neil):

“Welcome back to ‘Getting your Sh*t Together.’ I’m Neil, and I’m here with Jerome. Today we’re diving into a topic that’s incredibly important for anyone getting a mortgage: Insurance.”

Jerome:

“Ohh, this is a juicy topic Neil. Whether you're a first-time homebuyer or looking to refinance, understanding the types of insurance available to you is critical. Today we’re breaking down the key insurance options every mortgage client needs to consider. There’s a lot to cover, so let’s dive in.”

Neil:

“Let’s start with Default Insurance. Now, this is something that people often overlook or are simply confused by. If you don’t have a 20% down payment - it’s mandatory! But there’s a little more to it than that, right Jerome?”

Jerome:

“Yes for sure there is. Default Insurance, also known as Mortgage Default Insurance, is required by Federal Law in Canada when your down payment is less than 20% of the purchase price. There’s something about this type of insurance that is really important to know and remember though: while you – the customer pays for the insurance through a premium added to your mortgage, this insurance only protects the lender if you default on your mortgage—it doesn't protect you, the borrower.”

Neil:

“Really? So, if the lender is protected, what happens to the borrower in case of default?”

Jerome:

“Well, the insurance company will reimburse the lender for their loss, but they can still come after you—the borrower—to recover that money. You’re essentially paying insurance premiums that benefit the lender, not you. It’s important to understand this because many people assume they’re covered in case of default, but that’s not how this works.”

Neil:

“That’s a crucial distinction. You’re paying the insurance for the lender’s protection, not your own. However, it is this insurance that allows you to purchase a home with less than 20% for a down payment. So there is a benefit to it.

Let’s move on to the next hot topic - Creditor Insurance and Disability Protection, which can sometimes be a bit confusing for clients.”

Jerome:

“Right. First off, it’s important to know that Creditor Insurance and Disability Insurance are not mandatory. They’re often offered by the mortgage brokerage or lender, usually through the lawyer’s office when you're finalizing your mortgage.”

Neil:

“So, these are optional add-ons. What should clients be aware of when considering them?”

Jerome:

“Well, one thing to be aware of is that while the premiums for these policies stay the same throughout the mortgage term, the payout amount decreases over time as your mortgage balance goes down. That’s one drawback—it’s not like traditional life insurance, where the payout remains fixed.”

“And there’s something about the underwriting process that’s different from other insurance types, right?”

Neil:

“Yes, that’s a key point. Creditor and Disability Insurance often have something called ‘post-claim underwriting.’ This means the insurance company only fully assesses your eligibility after you make a claim. So, they could potentially find a reason not to pay out, which is a big concern for many clients. Unlike traditional life or disability insurance where underwriting happens upfront, here you don’t always know if you're fully covered until you need it.”

“Now let’s talk about Home Insurance, or Fire Insurance, as it’s sometimes called. This one’s mandatory, but there’s more to it than just ticking a box for your lender, right?”

Jerome:

“That’s correct. Home Insurance is required in every mortgage because it protects both the borrower and the lender. If there’s a fire or other major damage to the home, the insurance covers the cost of repairs or rebuilding. But here’s where it gets interesting: if there’s a low balance left on your mortgage when a claim is made, the lender gets paid out first, and the remainder goes to you to rebuild.”

Neil:

“Which might not always be enough to rebuild fully, right?”

Jerome:

“Exactly. Home insurance coverage is often based on the original purchase price or the replacement value at the time of the policy. If the cost to rebuild has gone up or you’ve made significant improvements, you may find the payout isn’t enough to cover everything. So, it’s a good idea to review your coverage regularly and make sure it’s up to date with current home values.”

Neil:

“Let’s move on to Life Insurance. This one can be a little more flexible than Creditor Insurance, but there’s still a lot to consider. What do clients need to know?”

Jerome:

“Life Insurance is one of those things that should be tailored to your personal situation. There are several types: term life, which is generally the simplest and most affordable, and whole or universal life, which offer more complex benefits. Term life insurance is great for covering specific needs, like the mortgage balance, but whole or universal life can be used for long-term planning and even build cash value over time.”

Neil:

“And some people may already have life insurance through their employer, right?”

Jerome:

“That’s true, many employers offer life insurance through group policies. But here’s the thing—it’s often not enough, and it may not cover you once you leave that employer. It’s important to review what coverage you already have and whether it meets your current and future needs.”

Neil:

“So, what’s the best approach here?”

Jerome:

“The best approach is to sit down with a licensed insurance professional who can assess your current situation and help you decide whether a term policy or a more comprehensive whole or universal policy makes sense. They can also make sure that any coverage you already have fits into your overall strategy, whether you need something minimal or something more robust for long-term planning.”

Neil:

“Jerome, this has been a ton of great information. For our listeners, we’ve put together a document summarizing all of these insurance types, which you can download from our websites.”

Jerome:

“That’s right! You can find the link in the show notes or visit our websites for a complete breakdown of these options. It’s important to protect your home and your family, so don’t hesitate to reach out if you have any questions or need advice.”

Neil: Hey everyone, welcome back to "Getting Your Sht Together!" Today’s topic might not be the happiest one, but it’s an important conversation—mortgages and divorce. Jerome, this is something that can really throw people for a loop, right?*

Jerome: Absolutely, Neil. Divorce is tough enough on its own, but when you add the complexity of a mortgage into the mix, it certainly adds to the amount of stress there already is. The big question a lot of people ask during this time is, “What now?” What happens to the mortgage? How do you split that responsibility? There are a lot of options, but it’s important to know what you’re facing so you can make informed decisions.

Neil: Yeah, it’s not something that’s often talked about until you’re right in the middle of it. But if you’re going through a separation or divorce and own a home together, you’ve got to make some big decisions about your mortgage. So, what are the main options people typically consider?

Jerome: Well, Neil, there are three main routes people usually take. First, one person might keep the home. In that case, they would either assume the mortgage or re-finance to remove the other person’s name. Second, the house could be sold, and the proceeds are split between both parties. Third, some couples decide to continue co-owning the property, even after the divorce, usually for the sake of kids or until the market conditions are better to sell.

Neil: Let’s break those down, starting with one spouse keeping the home. This is probably the most common situation we see, right?

Jerome: It is. The person who wants to keep the home will need to either “assume” the existing mortgage or do what’s called “Spousal Buyout” . The goal here is to remove the other person from the mortgage and title, which can be tricky depending on the finances of the person staying. They’ll have to qualify for the mortgage on their own, which means their income, credit, and debt levels are all factored into whether they can carry the mortgage by themselves.

Neil: Yeah, and that’s not always easy, especially if both incomes were needed to qualify for the original mortgage. The Spousal Buyout is one option, but that can mean taking on a higher interest rate or extending the mortgage term, right?

Jerome: Exactly. And don’t forget, when you refinance, you’re often pulling equity out of the home to pay off the other spouse, which adds to the new mortgage amount. If the house has appreciated since it was first purchased, you could be looking at a much bigger loan than the one you had before. But for some, it’s worth it to keep the home and provide stability, especially if kids are involved.

Neil: Then there’s the option to sell the home and split the proceeds. This can be more straightforward in some cases, but that doesn’t mean it’s without its challenges.

Jerome: True. Selling the home means you both walk away with whatever equity is left after paying off the mortgage and often times also includes the matrimonial debts. The challenge here is timing—sometimes the market isn’t favorable, or one spouse might not want to sell right away. But if you can agree to sell, this is often the cleanest way to split things financially and move forward. And then there’s the third option, where you continue co-owning the home after divorce. This is less common, but it does happen.

Neil: Yeah, this one is usually a temporary solution, like when both parties agree to keep the home for a few years for the sake of the kids, or they want to wait until the market improves before selling. But co-owning post-divorce can be tricky. You’ll still need to agree on mortgage payments, repairs, and other expenses, so it requires solid communication and cooperation. That can be a big ask after a divorce, right? But if it works, it could make sense for some couples. So, Jerome, what would you say are the most important things to consider when dealing with a mortgage in a divorce?

Jerome: The first thing is to get clear on your finances. Can you afford to keep the home on your own, or is it better to sell and start fresh? The second thing is timing— it’s best to not rush into any decisions just to “get it over with.”, but its also understandable in some situations. Third, and this is key, work with a mortgage professional to figure out your options. Whether you’re looking to refinance, sell, or keep co-owning, we can help you understand what’s financially possible and what makes the most sense for your situation.

Neil: Yeah, having the right advice can make a huge difference. Divorce is emotional, but when it comes to your home and mortgage, it helps to be practical. What are some common mistakes you see people make in these situations?

Jerome: One big mistake is assuming they can handle the mortgage on their own without running the numbers first. It’s important to be realistic about your income and expenses, especially if you’re now living on one income instead of two. Another mistake is not considering the costs of refinancing or selling—legal fees, penalties for breaking the mortgage, realtor fees if you sell. These costs can add up, so it’s important to know what you’re getting into.

Neil: Great points. As Mortgage Professionals, we will provide you with a detailed list of anticipated costs ahead of time so you know what to expect. A lot of people forget that there’s no one-size-fits-all solution. It really depends on your individual situation, your financial standing, and what’s most important to you—whether that’s keeping the home, selling, or finding a new living arrangement altogether.

Jerome: Exactly. The goal is to make the best decision for your long-term financial health, not just to get through the divorce process – although that may be a factor for some. But working with a mortgage broker can really help you navigate these options and avoid making decisions that could hurt you down the road.

Neil: I think that’s a good place to leave it. If you’re going through or about to go through a divorce or separation and aren’t sure what to do about your mortgage, reach out to us. We’re here to help you figure out the best path forward, whether that means refinancing, selling, or finding another solution.

Jerome: Absolutely. Divorce is never easy, but making smart financial decisions now can save you a lot of stress and heartache later. Thanks for tuning in, everyone. If you have questions, don’t hesitate to reach out—we’re always here to help you get your financial sh*t together.*

Neil: And don’t forget to subscribe and share this episode. Until next time, take care of yourselves and your finances!