Mortgage protection insurance is a type of optional insurance that’s designed to protect one of your most precious assets, your home. It can cover you, the borrower, in the unfortunate event of involuntary unemployment and inability to repay your home loan due to a severe illness, accident, disability, involuntary loss of job, or death.
Life can be full of uncertainties. But that should not stop you from pursuing cherished dreams, like owning a home. Unfortunately, your home could be at risk if you default on your mortgage payments. Mortgage protection insurance (MPI) can secure your family and property investment if the event of a personal crisis.
If you’re considering mortgage protection insurance, this post will help you with insights to determine if you need it.
How Does Mortgage Protection Insurance Work?
Mortgage protection insurance is also known as home loan insurance, consumer credit insurance (CCI), or borrower’s mortgage insurance.
In this type of insurance, home loan customers take out mortgage protection insurance policies when they begin their mortgage and pay an annual or monthly premium for coverage.
Depending on your insurance product, mortgage protection insurance will pay off your loan in case of death or if you’re diagnosed with a terminal illness. Or, it will help you with your home loan repayments if you are found to be with a serious illness or injury or lose your job.
The loss of a job usually refers to a situation when you are fired or made redundant. However, it does include voluntary resignation.
To qualify for mortgage protection insurance, you must have an existing home loan or have applied for one. This implies that you’ll also have to meet the lending criteria and secure your finance.
Furthermore, suppose you are a part-time, casual employee or self-employed, working less than 20 hours a week. In that case, you will generally not be eligible for mortgage protection insurance coverage.
Mortgage protection insurance is settled through a lump sum payment or periodic loan repayments for a specific time. It can be taken out on residential and commercial properties. The policyholder can either be the owner-occupier or holder of an investment property.
Thus, home loan insurances help secure your home and protect your family from experiencing financial hardship.
Mortgage protection insurance and Lenders Mortgage Insurance (LMI)
It’s worth mentioning that many home buyers think Lender’s Mortgage Insurance (LMI) and mortgage protection insurances are the same. But, on the contrary, they are pretty different.
LMI aims to protect the relevant credit provider in case home loan borrowers can no longer make their monthly home loan repayments. In contrast, mortgage protection insurance seeks to protect borrowers if they cannot make repayments.
Similarly, while most insurance policies are optional, LMI is a requirement if you borrow more than 80% of your property’s value. LMI is usually paid at the loan settlement and added to your home loan amount. As a result, it can significantly drive up the cost of your home loan by a few extra thousand dollars, depending on your deposit and loan amount.
What Does Mortgage Protection Insurance Cover?
As with other insurance policies, mortgage protection policies vary according to the insurer and the amount of cover sought. You’ll typically get one of three payouts based on your inability to make your monthly repayments.
Payouts may be for:
- Illness or injury: These are generally monthly payments that cover mortgage repayments if you fall seriously ill or suffer temporary or permanent disablement due to which you are unable to be employed. Depending on your policy, these payments can range from one month to three years.
- Involuntary job loss: These payments are mainly for the short-term, often not extending more than three months. A monthly payment will be made to cover your repayments if you are fired or made redundant, but not if you resign from your job. This is not a common policy, and many insurers do not provide this benefit. Therefore, read the fine print carefully if you pick up a policy expecting this cover.
- Death. If you pass away during your home loan term, mortgage protection insurance will continue to pay your mortgage repayments. Your family will not be burdened with repayment obligations. Your insurer may pay out a lump sum covering the cost of the home loan. In that case, your family can utilise the balance funds to be used by your family for whatever purpose.
Suppose you have any pre-existing condition or illness for which you receive medical consultation within the 12 months before taking out a mortgage insurance protection insurance. If that medical condition leads to a claim once your policy is in effect, it is doubtful you’ll get covered for that specific condition. It will be viewed as a pre-existing medical condition.
Further, your mortgage protection insurance will only offer cover for your mortgage repayments. It will generally not cover other expenses, such as a life insurance or income protection policy.
Also, it will not cover your food expenses and other household bills, including electricity, gas, phone, water, etc.
How Much Does Mortgage Protection Insurance Cost?
Here too, like life insurance loans, the cost of taking a mortgage protection insurance may vary based on your personal circumstances, including:
- The insurance company you chose to go ahead with.
- Your age and gender.
- Your health and smoking/non-smoking status.
- Whether the policy is single or jointly held.
- The size of your home loan amount, the remaining term and your monthly mortgage repayments.
- The details of the insurance policy, its inclusions and/or exclusions.
While the cost of each policy will differ based on the factors cited above, most mortgage protection insurance policies cost approximately 0.5% to 1% of your loan amount on an annualised basis.
Insurers and lenders keen to sell a policy should give you a quote. Compare mortgage protection quotes from different insurers and pick a deal that offers you the most suitable cover.
While it may seem that taking a mortgage protection insurance policy is cheaper than life insurance as it provides a less comprehensive cover, it may often not be so. In recent years, mortgage protection insurance has come under attack for offering low value to consumers.
Is Mortgage Protection Insurance Compulsory?
No, mortgage protection insurance is not compulsory. Instead, it’s a choice you’ll have to make based on your objectives and financial situation. Evaluating your need for this added protection insurance in light of your overall monthly expenses is one way to go about it.
“Along with your mortgage insurance premiums, you’ll also have monthly expenses like food and living expenses, school fees etc., to pay, even if you lose your job. If you have already provided for these expenses, then taking out mortgage protection insurance might make sense,” says Graeme John, Head of Growth at Joust.
However, if you don’t want to stress your savings or increase your home loan costs, then income protection is probably a better and more viable option.
Who Needs Mortgage Protection Insurance?
Mortgage protection insurance may work out to be expensive. However, it can be helpful if:
- Your employment is unstable; you’re a business owner or suitably self-employed, working more than 20 hours a week.
- You haven’t taken out a life insurance policy, or your benefit isn’t significant enough to cover your home loan repayments and living expenses.
- You don’t have Income Protection Insurance, or your monthly Income Protection benefit amount wouldn’t be enough to cover your mortgage and monthly household expenses.
If you’re looking for the security of your property ownership in a personal crisis and feel you can pay mortgage protection insurance, do get one. But, ultimately, it’s a call you will have to take based on your circumstances and factors.
Factors To Consider When Taking A Mortgage Protection Insurance Cover
If you do intend to take out a mortgage protection insurance cover, keep the following factors in mind:
- Cost.
- Range of cover.
- Age and condition of you/your dependants.
- Your insurer.
- Waiting period.
- Your overall financial situation.
1. Cost
Determine whether you can afford the costs of the policies you’re considering and whether the price is suitable for what you get back in case of a claim. If you’re going for a cheaper policy, ensure it still offers you the benefits you want.
Remember that the greater the cover you seek and the more features it has, the more expensive your premium will likely be.
2. Range of Cover
Determine the range of cover you need to be fully protected based on your circumstances. Ensure that your policy offers a good cover for your mortgage, including your interest and repayment, not just in the case of death but for various unfortunate events.
Since most home buyers claim for loss of employment, it’s advisable to look for a policy that can get you through a substantial phase of unemployment.
3. Age and Condition of You/Your Dependants
Depending on your health and lifestyle, you could consider specialist insurers who cater to your needs.
Factor in the number of your dependents, including children and ageing parents, when deciding the level and term of cover you need. Consider their age and condition and how long you think they will likely depend on you.
Where you have a young family, you will probably need support for a longer time, so you may need a higher level of cover. Conversely, where your kids are a bit older, you could probably opt for a more suitable lower level of cover.
4. Your Insurer
Some insurers specifically cater to specific health and lifestyle factors. However, nothing works better than an informed decision.
When looking for mortgage protection, spend some time researching your insurer and comparing different insurers’ policies. Also, check out customer reviews and feedback, and get personal advice from family and friends if they have any recommendations.
Finally, go ahead with an established and trusted company that is friendly and easy to deal with while offering you the best coverage.
5. Waiting Period
Since you’re taking out a mortgage protection cover to help you or your family tide over unfortunate events, the waiting period is significant.
Should anything happen to the family’s primary income earner, there’ll already be enough emotional upheaval. So look for a cover that offers the shortest waiting period before payout. This way, your family will have it easier in case of your untimely death.
Similarly, if you lose your job and income is stalled, you may need your money in the fastest time possible. Scan the fine print in detail or clarify with your provider how long it will take for the payout. The sooner, the better to prevent yourself from further financial duress.
6. Your Overall Financial Situation
You could consider a smaller cover depending on your other income sources, such as investments and other assets that can be sold in an emergency. However, it’s better to strike a balance and not go for a very low cover; you or your family may have to sell off substantial assets to pay the mortgage, leaving very little to fall back on.
Mortgage Protection Insurance vs Income Protection
Often people confuse mortgage protection insurance and income protection. However, they are pretty different.
Some of the key differences include:
- Flexibility: Mortgage protection insurance covers only mortgage repayments. It does not include household expenses like groceries, electricity, gas, water bills or similar expenses. On the other hand, income protection insurance covers your living costs if you develop a serious illness or injury that renders you unable to stay employed. It pays up to 90% of pre-tax income in the first six months and up to 70% for a designated time after six months. It can be used for mortgage repayments, bills, education, rehabilitation, etc., while you focus on improving your health.
- Provider: Mortgage protection insurance is mainly taken with the lender who provides your home loan. On the other hand, you can buy income protection insurance from an insurance broker, a financial adviser or an insurance company.
- Payout: Depending on the case, a mortgage protection insurance claim is paid either in a lump sum or through ongoing payments. You’ll have to pay a monthly premium to be covered by income protection insurance. In case of your death, most policies will pay your total benefit in a lump sum, thus enabling your family to clear the mortgage.
- Calculation: In case of injury, illness or death, mortgage protection payments are calculated depending on the size of your outstanding loan. Income protection typically covers a specified amount, for example, 70% of your income.
- Accessibility: Mortgage protection comes with many restrictions for self-employed people, but income protection also focuses on self-employed people.
- Availability: Getting mortgage protection insurance can be more challenging and covers fewer situations than the more commonly available income protection insurance.
So, suppose you have significant expenses other than your mortgage, which you’d like to maintain in case you cannot be employed or work. In that case, income protection insurance may work better for you. You can leverage its flexibility to cover a wide range of expenses.
Pros and Cons of Mortgage Protection Insurance
Pros
- Ability to safeguard one of your most significant investments: A mortgage protection binds your financial security, investment and home, thus preventing you from losing your home in case of death or involuntary unemployment.
- You can allocate for it with your mortgage: You can calculate the mortgage insurance protection costs alongside the mortgage and budget accordingly. Moreover, you will know how the insurance premium payments impacts your repayment period and the total cost of your mortgage. This will help you get a better idea of how much cover to take.
- Protects you from falling back on home loan repayments: Whatever the circumstances, be it death, serious illness, disability, redundancy or other involuntary unemployment for which you are unable to pay your mortgage, mortgage protection insurance ensures that your timely payments are taken care of.
- Flexible options: You can choose a policy that insures you based on the risk levels per your needs. You can opt for a lump sum payout in case of death so your family will be able to repay the entire mortgage. Alternatively, some policies cover mortgage repayment costs for a designated time, etc.
- Accessibility: Speedy application process and discounts on joint policies are other benefits of a mortgage protection cover.
Cons
- Poor coverage: In 2019, the Australian Securities and Investments Commission (ASIC) released a report indicating that most consumer credit insurance (CCI) products, including mortgage protection insurance, had failed consumers and were of extremely poor value.
- With claims ratios on home loan insurance being very low, there are chances that your insurer may not make out your claim. This can be another source of stress when you or your family are going through tough times.
- Less flexible: Mortgage protection insurance only covers your home. Other insurance options may be a better fit, including income protection cover, which covers mortgage repayments with additional features.
- Market risk: If the housing market collapses and your property value drops, you may be paying overpriced mortgage protection.
- Only one payout. If there are joint policyholders and both were to pass away, the surviving dependents will receive only one benefit when they go to claim.
Is Mortgage Protection Insurance Worth it?
Mortgage protection insurance aims to protect your home and continue the home loan repayments if something unfortunate were to cause your involuntary unemployment. But, at the same time, it has its limitations.
Are you planning to take out mortgage protection insurance? Joust is one of the most trusted online marketplaces for Aussie home loans. We offer our potential customers valuable tools to make informed home loan choices. You could use our free-to-use online Mortgage Payment Calculator to estimate your regular loan repayments and total interest payable. It’ll help you better understand your regular loan repayments and your capacity to accommodate insurance premium payments.
Regardless of taking out a mortgage protection cover, you should start saving for such emergencies and study other insurance options to determine which suits your circumstances.
Frequently Asked Questions (FAQs)
Is Mortgage Protection Insurance Tax-Deductible?
In most cases, premiums payable for mortgage protection do not qualify for tax deductions since the payment is not an expense in gaining assessable income.
What is the Difference Between Mortgage Protection and Life Insurance?
Mortgage Protection aims to cover your mortgage in case of death, serious sickness, accident, injury or involuntary unemployment. The level of cover will therefore be aligned with your mortgage.
On the other hand, life insurance (also known as death cover) will pay out a lump sum to the nominee/s mentioned in your policy upon your death. The nominated party uses the money as they wish, covering mortgage repayments or settling your debts.
