Home Insurance and Mortgages in Canada
Home insurance is not generally mandatory by law, but most mortgage lenders require borrowers to insure the property, name the lender on the policy and provide proof of coverage before funding a home purchase.
Most mortgage lenders require property insurance before lending
Insurance Bureau of Canada says that before lending money to buy a house, most banks or mortgage lenders require the borrower to purchase home insurance, name the mortgage lender on the policy and provide proof of the home or condo insurance purchase.
IBC — How to Buy Home Insurance →Why does the lender care about home insurance?
A mortgage is secured by the property. A severe insured loss can damage or destroy that security, so the lender has a financial interest in the building remaining adequately insured while the mortgage is outstanding.
That lender interest is different from your own need for dwelling, contents, liability and additional-living-expense protection. A policy should be reviewed as a complete insurance contract, not simply as a document needed to satisfy the bank.
Replacement cost and mortgage balance are different numbers
The amount needed to rebuild a home after a total loss can be very different from the outstanding mortgage balance or the home's real-estate market value. Labour, materials, demolition and reconstruction characteristics drive replacement cost.
That is why Canada Rate Lab keeps replacement cost separate from market value, mortgage balance and tax assessment when discussing property insurance limits.
IBC — Types of home coverage →What happens when the mortgage is paid off?
Once a mortgage is discharged, the lender's contractual insurance requirement may disappear, but the financial exposure to fire, water, weather, liability and other insured losses remains with the homeowner.
IBC notes that mortgage-free homeowners may sometimes qualify for discounts from some insurers. That does not mean dropping coverage is financially equivalent to remaining insured.
IBC — How to reduce home insurance rates →