Explore Income Protection

Our homes are often our most significant financial assets, as well as our greatest source of debt.

But what would happen if you were suddenly unable to make loan payments due to involuntary loss of employment or a serious illness? Luckily, most lenders offer mortgage protection insurance, which allows Australians to sleep well at night knowing that their repayments are protected against unexpected events.

What is mortgage protection insurance?

Mortgage protection insurance (also known as home loan insurance or consumer credit insurance) financially protects the homeowner from falling behind on their repayments in difficult circumstances. Mortgage protection insurance can be taken out on both residential and commercial properties. It’s also available for owner-occupied and investment property loans.

Mortgage protection insurance isn’t compulsory. That said, it may be worth having as a fallback for your loved ones if they’re suddenly left without your income. It can provide either an ongoing payment or lump sum to help you and your family keep up with your mortgage repayments.

How it works

Mortgage protection insurance can help pay your mortgage for a certain period if you’re unable to make repayments due to a serious illness, death or other event covered by the policy. When you make a claim, you or your listed beneficiary will receive a payout as stated in the policy.

Typically, you or your listed beneficiary will receive a single large payment (known as a lump sum payout) when claiming for death or a terminal illness diagnosis. If you’re made redundant involuntarily or are temporarily unable to work due to a serious illness or injury, mortgage protection insurance can help you keep on top of your home loan repayments with regular payments.

What does mortgage protection insurance cover?

There might be slight differences in the coverage that different lenders provide, but generally, most mortgage protection insurance policies will offer a payout for the following circumstances:

  • Death or diagnosis of a terminal illness
  • Involuntary unemployment
  • A serious illness or injury that prevents you from working.

You can view the details of what’s covered by mortgage protection insurance in the Product Disclosure Statement (PDS), which is one of the key disclaimer documents you get when purchasing a product. You should read the PDS before purchasing to know exactly what you’re paying for.

What can influence my mortgage insurance premium?

The following factors can all influence your mortgage insurance premium:

  • Single or joint policy. If you hold a single policy, your income dictates the cost of your premium. However, should you take out a joint policy with your partner, both incomes will be taken into consideration when calculating your combined premium, and you’ll both be covered for differing amounts.
  • Loan amount and repayments. Your premium will be influenced by the amount you repay on the home loan every month. This dictates the level of cover your loan protection insurance will include. The more you need to repay on your loan, the higher your premiums will typically be.
  • Your age. Your age at the policy commencement date is factored into the calculation of your premium.

Mortgage protection insurance vs. lenders mortgage insurance

There is often confusion between mortgage protection insurance and lenders mortgage insurance. Some might think lenders’ mortgage insurance is designed to protect the homeowner in case of loan default. However, that is not the case.

Lenders mortgage insurance (LMI) is a policy that a lender may require a borrower to take out to insure itself against the risk of not recovering the full loan balance from the borrower (i.e. if you can’t pay off your loan). In other words, it covers the lender, not the borrower.

Mortgage protection insurance, on the other hand, covers you, the borrower. It’s a lump sum payment (or ongoing payments made to cover the loan repayment amount for an agreed period) that your insurer pays to you when you can’t repay your mortgage. This can happen, for instance, if you lose your employment involuntarily, are temporarily or permanently disabled or pass away.

Mortgage protection insurance vs income protection

Income protection can offer up to 70% of your income in the event you’re unable to work. It offers more flexibility in protecting your lifestyle as opposed to just your home loan.

Conversely, mortgage protection insurance can pay you out in similar circumstances, but the payments go directly to your home loan instead of your back pocket.

While income protection insurance can be purchased relatively easily from an insurer, not all lenders offer mortgage protection insurance.

The pros and cons of mortgage protection insurance

Like many other financial products, mortgage insurance has a number of key benefits and drawbacks:

Peace of mind. You’ll know your policy will pay out to your beneficiary should you pass away.Your policy may only pay out once. This means your dependants will only receive a single benefit when they go to claim.
Premium discounts. Most providers offer premium discounts for joint policies.You and your partner are insured for different amounts relevant to your incomes. If you and your partner hold separate mortgage protection policies, this can get complicated in the event of your separation.
Fast application process. There are no medical evaluations or blood tests required to apply for a mortgage insurance policy.Less flexible than income protection. Mortgage protection insurance covers fewer events and offers fewer additional features than income protection.

We believe income protection is worth considering as well as mortgage protection insurance. By having both policies in place, you’ll have peace of mind knowing that both your home and lifestyle are protected should you be unable to work for a significant period or indefinitely.

Through our free income protection insurance comparison service, you can weigh up your options from the providers on our panel. It only takes minutes to complete a quote, so why not see if you can safeguard your income through us today?

Frequently asked questions

How do I make a mortgage protection insurance claim?

To start your mortgage protection insurance claim, you’ll have to contact your insurer. During your discussion with a consultant, you’ll need to supply the following information:

  • Your policy number
  • When you first fell ill or sustained your injury
  • When you stopped working.

After this point, it’ll typically take no longer than two months to find out whether your claim has been approved.

If your claim has been approved, it may take around 30 days to receive your payout. For this reason, it’s recommended you claim as soon as possible to minimise any payment delays. In the meantime, if you’re experiencing financial hardship, it’s worth contacting your home loan lender to discuss your options.

Who is eligible for mortgage protection insurance?

To be eligible for mortgage protection insurance, you’ll first need to have a home loan or have applied for one. This means you’ll also need to pass the lending criteria and secure your finance.

Another eligibility criterion for mortgage protection insurance includes having a minimum level of cover for specific benefit types (e.g. at least $100,000 for a death or terminal illness benefit). Keep in mind this may change between lenders.

What's excluded from mortgage protection insurance?

Like most types of insurance, there are some exclusions to be aware of. These can include:

  • Voluntary redundancies
  • Any injury or death that’s the result of illegal activity or reckless behaviour
  • Any serious illness that’s a pre-existing medical condition or caused by a pre-existing medical condition (such as cancer or a knee injury)

Specific exclusions for each insurance policy can be found in your PDS.

Is mortgage protection insurance tied to my home loan?

Your mortgage protection insurance may be tied to your home loan, but some lenders keep it separate. The difference for borrowers is that should you refinance or make other loan changes down the track, you may need to go through some additional paperwork to keep your mortgage protection insurance.

If your lender offers mortgage protection separately from the mortgage, you typically don’t need to worry about it even when refinancing.

Can I get mortgage protection insurance if I'm self-employed?

You can get mortgage protection insurance if you’re self-employed, but there may be stricter criteria in place. For example, you may need to provide proof of a regular income for one or two years prior to your home loan application, compared to the past three or six months required for other employees.

Meet our General Manager for Health, Life and Income Protection Insurance, Lana Hambilton

Lana Hambilton understands that mortgage protection insurance is a key aspect in safeguarding your personal finances.

Lana has 15 years’ experience in the health insurance and insurance comparison industries. She’s also a Board Member of the Private Health Insurance Intermediaries Association.

Lana’s top tips for mortgage protection insurance.

  1. If you take out mortgage insurance and the housing market crashes, or your house loses value for any reason, you might find yourself over-covered and paying more in premiums than the policy is worth.
  2. Consider how mortgage insurance premiums will affect your mortgage itself and how the cost of your premiums may add to your total repayment period to fully understand the value of your policy.
  3. Take into account your housing options if you are unable to pay your mortgage and have to default. If you or your family have the option of alternative housing, you might be able to go without. However, if defaulting on your mortgage would leave you on the street, mortgage insurance might be for you.

The information provided here is general only and does not consider your personal objectives, financial situation or needs. Before you decide to purchase a product, it is important to read the relevant PDS.

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