Title Insurance: Why Your Lender Requires It and Why You Might Want It Anyway

The purpose of title insurance

Title insurance protects against defects in property ownership. If someone sells you a home and later it turns out they did not have the right to sell it, or if a claim arises against the property from years ago, title insurance covers the cost of defending your ownership and resolving the claim.

This sounds implausible. How can someone sell you a home without owning it? It happens more often than most buyers realise. An ex-spouse may have an undisclosed claim on the property. A contractor or tradesperson may have filed a lien that was never properly discharged. A property line may be incorrect. Previous owners may have failed to pay property taxes, and the municipality may have a claim.

Title insurance catches these things before closing, when they can be fixed. If something is missed and only discovered after you own the property, title insurance covers the cost of sorting it out.

Lender's title insurance vs. owner's title insurance

Your mortgage lender requires you to buy lender's title insurance. This policy protects the lender's interest in the property. It is a condition of the mortgage. The cost is typically a one-time premium paid at closing, usually a few hundred dollars depending on the purchase price.

Lender's title insurance does not protect you. It protects the lender. If the title turns out to be defective after you close, the lender's policy protects the lender's investment. Your personal interest is unprotected unless you buy owner's title insurance as well.

Owner's title insurance costs extra. It is optional. But if you buy owner's title insurance, you get personal coverage for exactly the same risks.

Why a defective title matters

Imagine you buy a home for $1 million and close the transaction. A year later, a previous owner's spouse surfaces with a claim against the property that was never resolved. The title is now in dispute. You need a lawyer to sort it out. The legal fees are $10,000 to $20,000 minimum. If the claim is substantial, the dispute could cost far more and take years to resolve.

Title insurance covers those legal costs and the cost of resolving the claim. Without it, you pay out of pocket.

Another scenario: you buy a home and later discover the surveyed property line does not match the actual boundary. A fence encroaches on your neighbour's land. Removing the fence costs $5,000. Title insurance would cover that.

How title insurance differs from home insurance

Home insurance covers physical damage to the structure from fire, theft, weather, and other events. Title insurance covers ownership and legal claims. They are entirely separate risks and they require entirely separate coverage.

You need both. Home insurance protects the building. Title insurance protects your right to own the building.

The cost and whether it is worth it

Lender's title insurance is usually mandatory and non-negotiable. The cost varies by purchase price but typically runs from $300 to $500. That is a fixed cost of closing regardless of what you decide about owner's coverage.

Owner's title insurance is optional and costs roughly the same as lender's insurance, sometimes slightly less. So if lender's insurance costs $400, owner's insurance might cost $350 to $400 as well. The premium is a one-time cost paid at closing.

Whether to buy owner's title insurance is a personal decision based on your risk tolerance and your financial situation. If the purchase price is high and you are putting significant equity into the home, owner's insurance protects that equity. If the purchase price is lower and you have other protections, you may decide the extra cost is not worth it.

Your solicitor should explain both options clearly before you close. If they do not, ask.

What title insurance does not cover

Title insurance does not cover physical defects in the home. That is what a home inspection is for. It does not cover zoning issues that existed when you bought. It does not cover boundary disputes that existed before closing and were known to the owner. It covers hidden defects and claims that were not disclosed.

Read the policy exclusions carefully. They matter.

A final note

In some provinces, title insurance is nearly universal. In others it is less common. In Ontario, it is increasingly standard, but not everyone buys owner's coverage. The decision is yours, but it should be an informed one.

Talk to your solicitor about title insurance before you close. Do not skip this conversation. And if the concept is still unclear after that conversation, call me at 416-560-4983 and we can talk through it.