Title insurance is a type of insurance that protects the policyholder from financial losses due to defects in the title to a property. In Canada, it is common for banks to require borrowers to obtain title insurance as a condition of approving a mortgage loan. There are several reasons why Canadian banks require title insurance:
Protection for the lender: When a bank lends money to a borrower, it takes a security interest in the borrower’s property as collateral for the loan. If there are defects in the title to the property, such as liens, encumbrances, or other claims, the lender’s security interest may be jeopardized. Title insurance helps to protect the lender’s interest in the property.
Protection for the borrower: Title insurance can also protect the borrower from financial losses due to defects in the title. For example, if the borrower later discovers that there is an outstanding lien on the property, the title insurance policy may cover the cost of removing the lien.
Required by law: In some Canadian provinces, title insurance is required by law for all real estate transactions. Even in provinces where it is not mandatory, banks may still require borrowers to obtain title insurance as a condition of the loan.
Standard industry practice: Title insurance has become a standard industry practice in Canada, and many lenders require it as a matter of policy. This is because title insurance provides an added layer of protection for both the lender and the borrower, and can help to prevent disputes over title issues.
In summary, Canadian banks require title insurance as a way to protect their interests in the property and to mitigate the risk of financial losses due to defects in the title. Title insurance has become a standard industry practice in Canada, and is often required by law or as a condition of the mortgage loan.