Buying a property is one of the biggest investments many people will make in their lives. When it comes to securing a mortgage, many buyers may be so focused on the immediate steps ahead that they don’t consider having the right protections in place first. Understanding the different insurances available for your mortgage for further protection is an important part of protecting yourself and your loan if you’re unable to meet repayments.
What are the different insurances that can protect a home loan?
Three key types of insurance will protect your mortgage:
1. Lenders mortgage insurance (LMI)
This is a one-off premium payable if you want to buy a home, but your deposit is less than 20 per cent of the property’s value. LMI protects the lender in the event you’re unable to repay your loan. The premium is added to your total home loan amount, which means you’ll pay more interest over the loan term. While the extra interest is one of the main drawbacks of LMI, it helps people enter the property market sooner.
2. Mortgage protection insurance
This protects you if you’re unable to make loan repayments due to serious illness, injury or death. Each policy is different depending on the insurance provider, but generally provide trauma, death and terminal illness and special injury benefits. These benefits are typically paid in a lump sum.
3. Income protection insurance
This can pay up to 85 per cent of your gross income if you’re unable to work due to partial or total disability. The definition of disability and the level of cover provided depends on the income protection insurance policy.
What happens if you don’t get insurance for your mortgage?
If you don’t invest in protecting yourself and your home loan, you could end up in a costly financial situation. So, while the premiums for key insurances may seem like they add up, it far outweighs the risk of being unable to meet your financial obligations or support any dependents if you can’t repay your mortgage. Let’s take a look at an example.
Case study
Sam is 34 and a non-smoker. His home loan is $450,000. Unfortunately, Sam recently had a major fall at work, resulting in a head injury and several broken bones. He is unable to work for several months.
With his mortgage protection insurance, he could access his specified injury benefit and receive a lump sum of $8,500. Sam’s income protection insurance will pay 75 per cent of his salary for six months while he recovers. With these insurances in place, Sam could continue paying his mortgage and meet his living expenses while recovering from his injuries. Without these insurances, he may have had to sell his property and live off his savings.
How do you know which mortgage insurance to get?
Many mortgage holders have insurances attached to their superannuation or health insurance providers, so be sure to double-check the cover you already have before applying for any additional extra cover.
If you’d like to speak with someone independent of your mortgage application process, the Australian Government offers an assistance service. Contact the National Debt Helpline on 1800 007 007 to speak with a financial counsellor about protecting your mortgage. Additional services are available for small business owners, farmers or people in regional areas.
Alternatively, speak to your financial advisor as they are also able to assist you with protecting your loan and your financial security.
More like this
If you like this article, you might be interested to know that we share useful thoughts and information like this in our monthly financial insights email. You can subscribe to that email here. All subscribers receive a copy of our e-book: The 5 Key Pillars of Financial Independence.
General Advice Disclaimer
This article contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs and read all relevant Product Disclosure Statements before acting on the information. Whilst every care has been taken to ensure the accuracy of the material, Paradigm Strategic Planning or Sentry Advice Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.
Paradigm Strategic Planning Pty Ltd is an Authorised Representative of Sentry Advice Pty Ltd AFSL 227748