Our homes are often our biggest financial assets, as well as our greatest source of debt. When you take out a home loan, you are expected to pay off this most significant financial outlay during your life.
But what would happen if you were suddenly unable to make loan payments due to loss of employment, or a serious illness? Luckily, most lenders offer mortgage protection insurance, which allows customers to sleep well at night knowing that their repayments are protected against unexpected events.
What is mortgage insurance?
Mortgage insurance, also known as home loan insurance or consumer credit insurance, is a product that protects the borrower from the risk of default. It can be taken out on both residential and commercial properties and is also available for owner-occupied and investment property loans.
Mortgage insurance is designed to cover your mortgage repayments in the event of your passing, the diagnosis of a critical illness, or if you are totally and permanently disabled. Your bank might also offer you redundancy cover if you hold both mortgage and income protection policies.
What can influence my mortgage insurance premium?
The following factors can all influence the mortgage insurance premium:
- Single or joint policy. These are two different types of cover. If you hold a single policy, your income dictates the amount of your premium. However should you take out a joint policy with your partner, your partner will be insured for a different amount due to their income.
- Loan amount. The size of the loan will influence your premium.
- Your age. Your age at the policy commencement date is factored into the calculation of your premium.
- Repayment amount. Your premium will be influenced by the size of your repayments.
Mortgage insurance vs. lenders mortgage insurance
There is often confusion between mortgage insurance and lenders mortgage insurance. Some might think lender’s mortgage insurance is designed to protect the borrower in case of loan default. That is, however, not the case.
Lenders mortgage insurance (LMI) is a policy that a lending institution, such as a bank, takes out to insure itself against the risk of not recovering the full loan balance from the borrower, should the borrower fail to meet the loan payments. In other words, it covers the lender, not the borrower. For example, if the borrower’s home is repossessed by the bank, LMI pays the bank the gap between the property’s sale price and the outstanding amount on the home loan.
Mortgage protection insurance, on the other hand, is a lump sum payment (or ongoing payments made to cover the loan repayment amount for an agreed period) that the insurer pays to the policyholder in the event they lose their employment, are temporarily or permanently disabled, or pass away.
Income protection vs. mortgage insurance
Unlike income protection (which covers up to 75% of your income in the event you are unable to work) payments made under a mortgage insurance policy are calculated according to the amount you owe at the time of the insured event. Upon successfully claiming on your policy, you’ll receive a lump sum or in some cases an ongoing benefit payment towards your mortgage.
While income protection insurance can be purchased relatively easily, not all lenders offer mortgage protection insurance. Additionally, income protection offers more flexibility in protecting your lifestyle as opposed to just your loan, as it can assist in covering medical expenses and other living costs.
The pros & cons of mortgage protection insurance
Like many other financial products, mortgage insurance has a number of key benefits and drawbacks. We’ve listed them in the below table:
|Peace of mind. You’ll know your policy will pay out to your beneficiary should you pass away.||Your policy only pays out once. This means your dependents will only receive a single benefit when they go to claim.|
|Premium discounts. Most providers offer premium discounts of up to 10% 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.|
At comparethemarket.com.au, we believe income protection is worth considering as well as mortgage protection insurance. By having both policies, you’ll have peace of mind that your home and livelihood are protected should you be unable to work for a period of time or indefinitely.
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.