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Mortgage protection insurance explained: Do you need it and what’s covered?

A mature-aged couple arriving in a brightly lit home with shopping.

Buying a home is a huge financial responsibility which comes with a level of risk, but there are products available which can provide you some security if you’re suddenly unable to make your mortgage repayments due to uncontrollable circumstances.

Mortgage protection insurance (MPI), sometimes called home loan protection insurance, is just one option available to home buyers that can help cover repayments if you involuntarily lose your job, suffer illness or injury or pass away.

There are other forms of cover such as income protection insurance and life insurance that are available to you, so weigh up your options before committing to any policy.

Key points

  • Mortgage protection insurance is optional insurance that protects you in the event you’re no longer able to meet your home loan repayments.
  • It’s sold by lenders and insurance providers, and it can help cover your repayments for a predetermined period if you suffer from a serious illness or injury, are made redundant or if you pass away.
  • The pay out can only be used on mortgage repayments – not other expenses.

What is mortgage protection insurance?

Mortgage protection insurance is a type of insurance that you (the borrower) can take out while you’re paying off your home loan. It can protect you if circumstances arise which impact your ability to pay off your home loan, including:

  • Serious illness or injury
  • Involuntary unemployment
  • Death

Mortgage protection insurance is optional and it can help cover part of your mortgage if you’re no longer able to make repayments, or it may cover all of your home loan if you pass away – it depends on the policy.

In this way, mortgage protection insurance is similar to income protection insurance, except it is intended to only cover mortgage repayments.

What does mortgage protection insurance cover?

The amount of cover you’ll receive from mortgage protection insurance will vary depending on the policy and the event. For example, a typical policy might provide:

  • Up to $1,000,000 in a lump sum to pay off your home loan if you pass away. Any money left over will go to your estate to be used however they like.
  • Up to $10,000 a month to cover home loan repayments if you’re unable to work due to illness or injury (this may cover up to 24 months).
  • Up to $10,000 a month to cover home loan repayments if you lose your job (this may cover up to 6 months).

Do I need mortgage protection insurance if I have income protection?

Mortgage protection insurance works similarly to a life insurance or income protection policy, but the crucial difference is that it only covers home loan repayments.

It’s important to carefully consider this restriction – if your ability to pay off your home loan has been impacted by illness, injury, job loss or death, it’s also likely that your capacity to pay for other expenses such as bills, groceries and transport has been affected as well.

Therefore, you may not need mortgage protection if you already have income protection. Look at your income protection policy before signing up for mortgage protection.

What are the benefits of mortgage protection insurance?

Like other types of insurance, mortgage protection insurance helps to minimise the financial impact on you and your family if something unexpected happens to you. It can offer some assurance that you won’t fall too far behind on your mortgage, so you can keep your home if your finances take a hit. It can also help give your family peace of mind.

What are the drawbacks of mortgage protection insurance?

One of the most significant drawbacks of mortgage protection insurance is that it only covers your home loan repayments, not other expenses you may also have such as bills for electricity, gas, internet and water. For this reason, other insurances such as income protection may offer you better value.

Mortgage protection insurance is also limited in the kind of circumstances it covers, and how long you’ll receive cover. For instance, if you’re looking to claim on your mortgage protection due to being made redundant, you may only have cover for up to 6 months.

Something else to consider before taking out mortgage protection insurance is whether you already have cover for your mortgage repayments in another policy. This could be found in life insurance or income protection insurance as part of your superannuation fund, so it might be a good idea to review these policies before signing up.

How much does mortgage protection insurance cost?

The cost of mortgage protection insurance will vary for different borrowers. Generally, the insurance provider will look at the following when determining how much you’ll pay:

  • The loan amount
  • How much you’ve repaid
  • How many names are on the policy
  • Your age
  • How much cover you might need

When it comes to weighing up the cost, it’s up to you to decide whether the price is worth it.  For example, if your policy works out to cost $3.50 a day, that turns out to be $1,277.50 each year. As always, you should compare quotes before signing up to any policy, and also consider alternatives such as income protection which may offer better value.

Who needs mortgage protection insurance?

You might benefit from mortgage protection insurance if you have a small home loan deposit of less than 20% – in other words, a loan-to-value ratio (LVR) of 80% or more.

You may also be interested in mortgage protection if you would like to mitigate the financial risk to your family if something unexpected were to happen to you (such as illness or death), but keep in mind that other types of insurance can also provide this, including income protection or life insurance.

Mortgage protection insurance: FAQs

Do I need to pay any excess on mortgage protection insurance?

While you won’t have to pay excess, there is something called an excess period – this is the waiting period until your mortgage protection insurance kicks in. While you can choose the period of time, keep in mind that the shorter it is, the higher your premium is likely to be.

Are there any exclusions with mortgage protection insurance?

The type of exclusions in your policy will depend on the insurance provider. Be sure to read the Product Disclosure Statement (PDS) for any conditions that might deny you cover, such as pre-existing medical conditions.

Can I take out mortgage protection insurance with another lender?

It depends on your home loan lender. Many lenders offer mortgage protection exclusively to their home loan customers, such as ANZ, while other lenders will offer them to all mortgage holders. You might also get mortgage protection as part of your existing life insurance or income protection policy, such as through your super fund.

Jasmine Gearie
Jasmine Gearie
Senior Money Writer

Jasmine joined Mozo from TechRadar Australia, where she covered the telco and NBN sector for over three years. She’s now turned her attention to the world of personal finance, with a special interest and expertise in home loans and savings accounts. Jasmine studied a Bachelor of Communication (Journalism and Public Relations).

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